Stock liquidity bubble can't be solved by banks
By Ma Hongman (China Daily)Updated: 2007-02-12 08:35
As the debate on liquidity-caused bubbles on the domestic stock market intensified, the regulators remained silent until late last month, when the China Banking Regulatory Commission (CBRC) ordered commercial banks to stop making loans used to trade stocks.
The CBRC said if any violation of the rules occurred, the banks will be held responsible.
The CBRC move aims to curb financial risks as an increasing amount of money is rushing into the stock market. But the policy may not work as effectively as expected.
As the stock market remained bullish for most of January, investors remained optimistic. Some took out bank loans to buy stocks.
This caused market risks to rise and the bubbles to keep swelling.
Once the market tumbles, as it did recently, the index will drop and much of the capitalization will evaporate. Those who used bank loans to invest will face extreme pressure from both investment losses and their debts to the banks.
For this reason, the CBRC move is in the right direction, but it will be hard to implement the policy.
What the new CBRC rules forbid has long been stipulated in the securities law and other relevant regulations. In reality, however, the practice of bank loans for stock investment has never been rooted out, because both investors who borrow from the banks and the banks want to continue the practice.
As the market remains bullish, the rising stock index ushers in more investors and capital, which in turn further pushes up the market.
Many investors want to make quick profits as the market continues to rise.
The commercial banks are also faced with pressure to make profits. Due to
their lack of skill in providing competitive financial services, they have
largely relied on the interest rate gap between the loans and deposits to make
money.
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