Chinese banks warn against using loans for stock market investments

(ECNS) -- As Chinese investors flood into stock markets, spurred by recent government policy updates, some banks have issued warnings that loan funds are prohibited for trading, and any such loans will be immediately withdrawn if misused.

Media reports indicate that the number of accounts that opened in major securities firms reached a record high during the National Day holiday, though Chinese stock markets were closed in that period, whereby loan applications surged massively.

To attract borrowers, some banks have lowered the annual percentage rate (APR) on consumer loan products to less than 3 percent after several rounds of interest rate cuts. The APR on some consumer loan products has dropped to 2.88 percent, with a few offerings even below 2 percent.

Insiders have cautioned that these low APRs might lead to cross-market arbitrage. As China stocks soar, some investors have illegally used consumer loans for stock speculation.

Financial authorities have provided guidance to commercial banks, requiring that financial institutions strictly control the increase of leverage to protect investors, and bank credit funds are strictly prohibited from unlawfully entering the stock market. According to Financial News, a media outlet managed by China's central bank, financial institutions have been instructed to strictly limit such activities to safeguard investors. 

Data from ChinaDataPay shows that as of Wednesday, over 20 banks -- mainly agricultural commercial, and local banks -- issued statements warning that any loans used for speculation would be recovered ahead of schedule.

Bank account managers also reminded of clients in WeChat Moment that consumer loans are limited to personal and family daily consumption and shall not be used into housing markets, stock markets, investments, wealth management, and other areas.

Many banks have faced penalties for allowing credit funds to flow into the stock market and other restricted areas as regulation becomes stricter.

Wang Pengbo, chief analyst of financial industry in Broadcom Inc., noted that consumer loans entering the stock market is effectively adding leverage. He explained that once the market fluctuates, the losses will be amplified due to the leverage effect, and the losses will far exceed the use of their own funds. He added that misuse of credit funds could cause capital mismatch, inflate asset bubbles, and the risk might also spread to financial institutions, leading to an increase in non-performing loans of banks and a poor asset quality.