Reply #34: China to Inspect Banks' Loans to Restrict `Hot Money' [View All]

[Ghost Dog]

http://www.bloomberg.com/apps/news?pid=20601080&sid=aL2lrSOXH4ng&refer=asia

June 26 (Bloomberg) -- China's currency regulator plans to start a nationwide inspection of banks' foreign loans to curb illegal inflows that have helped to inflate the country's surging stock and property markets.

Banks should check that their books comply with laws on short-term foreign debt, the State Administration of Foreign Exchange said on its Web site today. The regulator said it's already punished 19 local and 10 foreign banks for breaking currency rules in a probe that started last year.

The inspection highlights concern that ``hot money'' is pushing up asset prices, driving growth in China's $1.2 trillion of foreign-exchange reserves and undermining efforts to cool the economy. A crackdown on investments with borrowed money and a tripling of the tax on share trades failed to halt a 92 percent advance in the benchmark stock index this year.

``The government is suspicious that speculative funds have been a reason for the rapid increase in the nation's foreign- exchange reserves,'' said Sun Mingchun, a Hong Kong-based economist with Lehman Brothers Inc. ``Such inspections can help stem hot money inflows`` and ``serve as a warning to speculators.''

The CSI 300 Index rose 1.3 percent today, gaining for the first time in three days. The index has almost tripled in the past year and trades at 44 times earnings, the most expensive in the Asia-Pacific region.

Central bank Governor Zhou Xiaochuan, who oversees the currency regulator, said June 23 that he's ``closely watching'' the stock market and is concerned about a possible bubble.

Disguised Funds

The nationwide inspection will start ``soon,'' the regulator said in today's statement. It didn't name any of the banks that broke the rules or specify penalties.

Some banks failed to check the authenticity of client transactions and broke other regulations, resulting in inflows of speculative funds disguised as trade and investment, the statement said. Some funds ``even entered the domestic real estate and stock markets, having a certain impact'' on government efforts to cool the economy, it said.

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China's foreign-exchange reserves, the world's largest, jumped 37 percent from a year earlier in March. The increase in reserves has flooded China's financial system with cash, making it harder for the central bank to slow lending and investment.

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