China Regulator Warns Chinese Banks

China regulator warns Chinese banks off speculative moves.

China’s battle to counter rising stress in its financial system escalated this week.  Regulators issued a new warning to Chinese banks.  The banks were warned not to engage in speculation that creates asset bubbles.  Furthermore, they said, such activities prevent money from flowing to more productive areas of the economy.

The country’s banking regulatory authority circulated a directive on Monday.  First of all, banks were instructed to carry out self-checks by late November on their involvement in what it termed “irregularities.” In addition, the document said that such actions include making highly-leveraged bets on markets via popular investment products.  This includes the excessive use of a newly-popular form of short-term debt that banks are increasingly relying on for funding.

Although the regulatory authority did not offer details, they did warn of “severe penalties” for banks found to have committed violations of its new guidelines.  Furthermore, they criticized behavior described as “working without bending down” and “sitting there collecting free money.”  Instead, they urged banks to do more to ensure money flowed to China’s “real economy.”

Most noteworthy, the regulator’s latest broadside follows fresh signs of financial strain in the world’s second largest economy.  The interbank market is a vital part of the financial plumbing of big economies.  There banks borrow from each other to cover their daily needs.  Last month China’s interbank market suffered a severed cash crunch.  As a result, borrowing costs rose to their highest level in two years.

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