The Chinese stock market has attracted huge amounts of capital, much of which is speculative or illegal money.

The Chinese stock market has matured under stricter supervision from regulatory agencies. On June 18, the China Banking Regulatory Commission (CBRC) announced it would punish eight Chinese banks for their negligence in overseeing two state-owned companies charged with the illicit use of bank loans. The two guilty companies will be punished by the State-owned Assets Supervision and Administration Commission of the State Council in the near future.

Billions misused

The eight banks punished by CBRC include the Bank of Beijing, Industrial and Commercial Bank of China (ICBC), Bank of China, Bank of Communications, China Merchants Bank, China Citic Bank, Industrial Bank and the Shenzhen Development Bank. All of these banks are listed companies except the Bank of Beijing, which is expected to be listed soon.

The action resulted from CBRC's findings earlier this year that China Nuclear Engineering & Construction (Group) Corp. (CNEC) and China Shipping (Group) Co. had diverted bank loans into improper investments. The investigation concluded that since 2001, CNEC received loans totaling 2.366 billion yuan for the purpose of building nuclear power plants from commercial banks like the Bank of Communications and the Bank of Beijing. Of this, 132 million yuan was discovered as having been misused in the stock market.

Since June 2006, six banks made loans totaling 2.7 billion yuan to China Shipping, 2.4 billion yuan of which was diverted to securities companies and used to buy initial public offering (IPO) shares.

Analysts warn that misused capital is very harmful to the stock market because this money is mostly in the form of short-term, speculative capital and it can impact market performance in a negative way. Using such funds, speculators can easily increase market risks and devastate small and medium investors.

The Securities Law of China clearly states that bank loans are prohibited from being diverted into the stock market. Last year, a December notice by the CBRC noted that it was strictly forbidden for any company or individual to directly or indirectly use bank loans to enter the stock market. It also forbids banks to make loans to companies or individuals to trade stocks. If the illegal use of bank loans is discovered, banks must recall the full loan immediately.

No dents yet

On the second day after the CBRC announcement, the Bank of Communications and the Bank of Beijing said they had recalled the misused loans.

Other banks involved in the scandal also stated that they had begun large-scale investigations over improper use of loans and would recall misused loans once they are discovered.

"The misused money is unfair to small investors and cracking down on the culprits actually protects the fairness of the stock market," said Wang Liangguang, a stock trader. Wang said institutional investors borrow money from whichever channels they can and buy IPO stocks, reducing small investors' opportunities to buy those stocks. Wang said he had not succeeded in buying an IPO stock for the past 10 years.

Yin Zhongli, banking expert with the Chinese Academy of Social Sciences (CASS), believes that the CBRC's effort is conducive to the long-term and healthy development of the stock market.

Yin said the bank loans invested in stock market increase the risks in stock market. Once the market tumbles sharply, borrowers face the pressure of the loss in value, the accumulated loan interest, coupled with their mortgages to the banks. All this can lead to widespread panic. "The retreat of such illegal funds is good for the stock market," Yin concluded.

Guo Tianyong, banking professor with the Central University of Finance and Economics, believes that regulators didn't intend to hurt the stock market, but wanted to reduce financial risk.

Guo said that if misused loans made money in the stock market, some people would get rich overnight. If they lost in the market, the risk would be transferred to the banks, and be further transferred to the government, eventually creating a great risk to the country.

Tip of the iceberg

Faced with revelations of the sheer numbers involved in these misused bank loans, people cannot help but ask, "Are there any more?"

"There are many banking personnel trading stocks using bank loans," said an ICBC staff, who declined to be named.