Move follows ABC disclosure that employees illegally sold 3.9b yuan in bills
China's five biggest State-owned banks have suspended most of their note resale businesses, domestic media reported on Monday, after Agricultural Bank of China (ABC) revealed that it faced a huge potential loss involving a "bill incident."
In response, ABC, Industrial & Commercial Bank of China (ICBC), China Construction Bank, Bank of China and Bank of Communications have suspended their bill resale businesses, with the exception of a limited quota for special clients, the China Business News reported on Monday, citing an unnamed person familiar with the interbank market.
ABC said in a statement on Friday that it risks losing 3.9 billion yuan ($592.87 million) from an incident that took place at its Beijing branch. Two bank employees stand accused of reselling 3.9 billion yuan worth of discounted bills of exchange to another bank through an unidentified third-party agency, according to media reports. The employees then used the proceeds to invest in the stock market.
The Ministry of Public Security and the China Banking Regulatory Commission (CBRC), the country's banking regulator, also reported the case to the State Council, Caixin reported on Friday.
Discounted bills of exchange refers to bills sold for early payment to a bank for less than face value before maturity. The bank then collects full value on the instrument when payment comes due. Sometimes, for the purpose of obtaining cash early, the bank may resell such discounted bills of exchange to another commercial bank.
The CBRC warned banks in a notice at the end of 2015 about risks in the bill business and cautioned that the bill trading business at some banks violated relevant rules. In the document, the regulator required banks to take measures to minimize risks.
In response, a branch of ICBC issued a notice calling for the suspension of accepting discounted bills from industries such iron ore, steel trading and coal, the China Business News report said, citing sources close to the matter.
In regards whether the tightened controls over bill trading would squeeze liquidity in the stock markets, experts believe the ABC incident is just an individual case, and the amount of capital illegally flowing from the interbank market to stocks is limited, so it won't have much of an effect on equities.
