Tighter regulation of Chinese banks’ bill financing could trigger stock market panic, analysts say

Chinese banks’ bill-financing business could be in the eye of a storm.

With police launching investigations into a series of massive fraud cases involving insiders illegally obtaining the bills to invest in stock markets, analysts say a possible tightening of regulations could reduce liquidity in money markets and trigger a panic in stock markets if more cases are exposed.

China Citic Bank, a banking subsidiary of giant conglomerate China Citic Group, recently revealed a 969 million yuan fraud case. An employee in the bank forged documents to acquire a bill and sold the bill multiple times in order to invest in the once-sizzling stock markets. But the employee was caught in the fourth quarter, media reported, after the Chinese stock markets plunged from a seven-year high in June.

Agricultural Bank of China, the country’s third-biggest lender by assets, confirmed a similar fraud case last month. Media reports said two employees of the bank illegally sold 3.9 billion yuan worth of bills to obtain cash and invest in the stock markets, but failed to fill the gaps after the markets slumped in the second half of the year. The bank discovered the bills in the safe box had been replaced with newspaper, Caixin reported.

Both China Citic Bank and Agricultural Bank said in separate exchange filings that the police had started investigations.

A bill, also known as banker’s acceptance, is a money market instrument commonly used for short-term corporate financing. It can be sold at discounted prices before its maturity, which is up to six months.