Ma Hongman
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.
As a result, many want to make more individual loans to increase
profits, although they know the borrowers may use the money to
invest in the stock market.
Bankers believe that the current stock market will continue to
rise despite occasional corrections. Their thinking is that the
risks for the investors will not be very high.
Not entirely at risk, the banks are covered by the borrowers'
mortgages. If the borrowers suffer severe losses on stock
investments, the banks can sell the collateral to retrieve part of
the loans, limiting their overall risk.
Therefore, the commercial banks may not be adequately motivated
to follow the CBRC orders to stop such lending.
Moreover, those who want to borrow from the banks to invest in
the stock market may resort to some financial maneuvers to
circumvent the banks' tracking the loans.
As a result, although the regulators have taken a harsh stance,
it is hard for them to stop bank loans from flowing into the stock
market simply by pressuring the banks.
The stock regulators have repeatedly reminded investors of the
potential risks of the market. Although risks are intrinsic to the
stock market, as long as investors expect to profit, they will find
ways to obtain funds to invest.
Even if the regulators can plug the commercial bank loopholes,
investors can secure money from other sources. This would make
regulating such money flows even more difficult.
Other countries' experience shows that it may be better for
regulators to take a more liberal stance toward such investment
zest rather than trying to control the barely controllable flow of
capital.
In developed countries, banking regulators generally stipulate a
series of strict bottom-line rules for commercial banks to issue
loans.
For example, in the United States, where the bad loan ratio is
quite low compared with other countries, the banks cannot issue
loans worth more than 90 percent of the mortgaged property, such as
buildings.
With those requirements met, the lending risks are under control
and the banks are allowed to make loans without keeping track of
how the money is used. The borrowers can use the money to buy
stocks so long as they meet the loan requirements.
Such a policy is obviously more in line with the development of
a modern market economy. The banks are commercial entities that aim
to make profits. In their own interest, they will assess the risks
of making the loans and will determine whether the collateral can
cover possible losses.
It will not work if regulators require the banks to shoulder the
responsibility of solving the macroeconomic problem of excessive
liquidity.
It is the regulators' duty to help the commercial banks to
establish their own risk assessment system. They should also
provide timely information for the financial institutions to make
the right decisions and reduce risk.
For example, they can establish a nationwide individual credit
network and a unified statistical database. This way the banks can
have more information on loan applicants.
The author holds a doctorate in economics from the Shanghai
Academy of Social Sciences
(China Daily February 12, 2007)