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Tighter lending to affect bourses
( 2003-07-30 10:16) (China Daily)

The central bank's moves to tighten money supply and curb money laundering will have an impact on fund flows to the bourses in the second half of the year, analysts say.

Among mounting concern of financial risks, Zhou Xiaochuan, governor of the People's Bank of China, said earlier this month that the bank's priority in the second half of this year was to pay attention to and analyze the rapid loan growth and possible risks.

He also recently warned of inflationary pressures following drastic money supply growth and consequent bubbles in the real-estate sector and the stock market.

China's total outstanding loans soared by 22.9 per cent year-on-year to 15.9 trillion yuan (US$1.9 trillion) at the end of June, pushing M2 - the broad money supply that covers cash in circulation and all deposits - to a six-year-high growth of 20.8 per cent to 20.5 trillion yuan (US$2.5 trillion).

Zhou's remarks, together with a central bank's recent report suggesting an increase of the reserve fund rate, is regarded as a sign that the financial authorities would tighten monetary policy in the second half.

In theory, bank funds cannot enter the stock market directly so reduced bank lending should not directly affect the bourses, said Gui Haoming, an analyst with Shenyin & Wanguo Securities.

But in reality, many institutional investors borrow from banks; acquiring loans under items like cash flow needs.

"If the central bank narrows the loan supply, it will certainly force institutional investors to reduce investment in the bourses, so the impact on the stock market will be obvious," said Gui.

But he added that investors need not be pessimistic as the lending scale-back would not be large.

The central bank also issued a regulation in April to strengthen management of the renminbi settlement accounts, including stock-trading accounts at brokerages.

The regulation, to be effective in September, requires stock buyers to place their guarantee fund in a special personal settlement account at banks instead of at brokerages. Moreover, investors can no longer draw cash from their trading accounts at the brokerages; they have to transfer the money to the bank settlement account first.

The identities of those who open such accounts will be checked; and analysts say that the move would strengthen monitoring of stock trading funds and curb money laundering.

"Obviously, it will be harder for price-riggers to use fake names to open several accounts and then transfer or cash in the gains," said an employee at the Beijing trading branch of Soochow Securities.

Strict settlement-account management may force some of the funds that have entered the market through irregular channels to be withdrawn; and turn away some potential clients of brokerages.

At the same time, the bourses are in an expansion phase with many companies lining up for listing.

Di Yongzhong, an analyst with GF Securities, predicted there would be 40-50 billion yuan (US$4.8-6 billion) of initial public offerings the second half of the year, roughly the same as a year ago.

That would require almost a doubling of money supply in the secondary market to absorb the new shares and maintain a stable fund supply for other shares.

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