CHINA'S central bank has ordered all financial institutions, except brokerages and unit trust companies, to wind up or sell off their stockbroking units by the end of the year in a bid to check their rampant speculation in the stock markets.
Analysts said the People's Bank of China (PBOC) was concerned that hot money from financial institutions, such as banks, credit co-operatives and insurance companies, was behind the spectacular rise in mainland stocks in the week before the two interest rate cuts this year.
China cut deposit rates by an average 0.98 of a percentage point and lending rates by 0.75 of a percentage point on May 1. On August 23, it lowered deposit rates by 1.5 percentage points and lending rates by 1.2 percentage points.
A week before the cuts, rumours of the credit-easing fuelled frenetic trading on the Shanghai and Shenzhen exchanges.
Their daily combined turnover consistently exceeded 10 billion yuan. Although some funds came from foreign investors buying B shares, the PBOC believed funds were mainly from domestic financial institutions.
'The PBOC suspected the lion's share of the funds came from the financial institutions, but there was no way it could thoroughly check the sources,' one trader said.
These activities were funded mainly by savings deposits and, being speculative, could trigger huge losses which the PBOC fears would affect the standing of the financial institutions.
