China is struggling to stop loans from being illegally used for stock purchases because banks lack information on borrowers and are focused on short-term profits, an adviser to the industry regulator said.
"When a company asks for a loan to replenish its working capital, banks have a hard time figuring out whether it's telling the truth," Sir Howard Davies, former head of Britain's Financial Services Authority, said in Beijing yesterday.
Investments with borrowed money have helped drive an 83 percent surge in China's key stock index this year, prompting official warnings of a bubble. The China Banking Regulatory Commission is concerned that banks' pursuit of growth may expose them to the risk of bad loans in the event of a crash, Bloomberg News said.
"Investors are a bit too confident that the Chinese government will always step in to bail banks out," said David Marshall, managing director of Asia financial institutions at Fitch Ratings in Hong Kong. "Domestic and foreign shareholders alike turn a blind eye to risk management problems in their emphasis on growth."
Loan growth in China has surged, driven partly by demand for money to invest in stocks. Bank lending rose 17 percent in the first five months of this year to 2.09 trillion yuan (US$275 billion). More than 28 million brokerage accounts have been opened so far in 2007, more than five times the total for all of last year.
China spent about US$500 billion bailing out its banks in the past decade, according to Moody's Investors Service.