Cen­tral Bank says will crack down on un­der­ground banks, stem cap­i­tal flight

The Pak Banker - - FRONT PAGE -

China's cen­tral bank cut its bench­mark lend­ing rate for the fifth time since Novem­ber and low­ered the amount of cash banks must set aside, step­ping up ef­forts to cush­ion a stock mar­ket rout and deep­en­ing eco­nomic slow­down.

The one-year lend­ing rate will drop by 25 ba­sis points to 4.6 per­cent ef­fec­tive Wed­nes­day, the Bei­jing-based Peo­ple's Bank of China said on its web­site Tues­day. The one-year de­posit rate will fall by 25 ba­sis points to 1.75 per­cent.

The ac­cel­er­a­tion of mon­e­tary eas­ing un­der­scores pol­icy mak­ers' de­ter­mi­na­tion to meet Premier Li Ke­qiang's 2015 growth goal of about 7 per­cent. The risk of cap­i­tal out­flows and tighter liq­uid­ity af­ter China de­val­ued its cur­rency on Aug. 11, weaker-than-forecast eco­nomic read­ings, and re­newed stock mar­ket weak­ness, added pres­sure for fur­ther stim­u­lus.

"The econ­omy is still un­der im­mense down­ward pres­sure," Yao Wei, a Paris-based China economist at So­ci­ete Gen­erale SA, wrote be­fore the move. "Fis­cal pol­icy has to step up, and mon­e­tary pol­icy is likely to play an as­sist­ing role by pro­vid­ing tar­geted liq­uid­ity."

The PBOC on Aug. 11 an­nounced it will al­low mar­kets greater say in set­ting the cur­rency's level, which spurred the big­gest de­val­u­a­tion in two decades and threat­ens to trig­ger an out­flow of cap­i­tal. The PBOC has in­ter­vened to stem losses af­ter the move.

De­fla­tion risks, over-ca­pac­ity and a debt over­hang re­main a cloud over an econ­omy forecast for its slow­est ex­pan­sion since 1990. China's in­dus­trial pro­duc­tion, in­vest­ment and re­tail data all trailed an­a­lysts' es­ti­mates in July.

Be­fore to­day's move, cen­tral bank Gover­nor Zhou Xiaochuan had al­ready this year low­ered the re­quired re­serve ra­tio twice, with an ad­di­tional move tar­geted to cer­tain banks. Of­fi­cials are also act­ing to boost lend­ing and are ex­pand­ing lend­ing ca­pac­ity at the coun­try's pol­icy banks.

The na­tion's in­dus­trial pro­duc­tion, in­vest­ment and re­tail data all trailed an­a­lysts' es­ti­mates in July, while ex­ports fell and pro­ducer price de­fla­tion deep­ened. Bloomberg's monthly gross do­mes­tic prod­uct tracker sug­gests the econ­omy ex­panded at a 6.6 per­cent pace from a year ear­lier in July.

China said it would launch a three-month crack­down on un­der­ground bank­ing to curb money-laun­der­ing and illegal funds trans­fers as un­sta­ble mar­kets stoke fears of cap­i­tal flight.

Wor­ries over China's eco­nomic slow­down and pos­si­ble in­ter­est rate rises by the U.S. Fed­eral Re­serve have led to a wave of cap­i­tal out­flows this year. Chi­nese law pro­hibits in­di­vid­u­als from trans­fer­ring more than $50,000 out of the coun­try per year, but the un­der­ground bank­ing in­dus­try has thrived in re­cent years as a chan­nel to send money out of China.

"Some ' grey funds' have been trans­ferred through un­der­ground money shops across the bor­der, which not only poses a se­ri­ous risk to our for­eign ex­change man­age­ment but also dis­turbs the or­der of fi­nan­cial and cap­i­tal mar­kets and threat­ens our fi­nan­cial safety," Vice Min­is­ter Meng Qingfeng was quoted as say­ing on the Min­istry of Public Se­cu­rity web­site.

In April, a sim­i­lar cam­paign found 66 un­der­ground banks re­spon­si­ble for il­le­gally fun­nel­ing out more than 430 bil­lion yuan ($67.5 bil­lion), the min­istry said.

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