China’s anxiety about the flow of money into its bubbling stock markets prompted the Government to punish 29 international and domestic banks this week, including HSBC and Standard Chartered, for failing to halt speculative capital inflows.

The State Administration of Foreign Exchange (Safe) said that it had disciplined 19 domestic banks and ten foreign lenders for helping speculative foreign capital to enter the stock and property markets disguised as trade or investment.

The entry of such funds had had an impact on China’s economy, putting pressure on the central bank’s monetary policy operations and the international balance of payments.

The administration is anxious to deter speculators from betting on a rise in the yuan, which is not generally convertible for purely financial purposes not related to trade and direct investment.

However, the currency has climbed steadily, gaining 8 per cent since currency reforms in July 2005 when Beijing freed the yuan from its longstanding peg to the dollar.

HSBC and Standard Chartered confirmed that they were among the banks targeted in the crackdown on speculative inflows after inspections by Safe in March and April. HSBC said it had been in discussions with the administration to take the necessary steps to meet Safe reporting requirements. Standard Chartered said it, too, had taken appropriate actions after the audit. The punishments meted out to the banks were not specified.

China has been tightening monetary policy and also using administrative tools to try to cool the economy and various overheated industries.

Other institutions targeted by Safe include Citigroup’s Citibank, Bank of East Asia, and branches of China’s big five state-owned commercial banks – Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of Communications and China Construction Bank.

The actions could have been a factor in a sharp 4 per cent fall on the Shanghai stock market yesterday, the largest percentage fall in three weeks. The market closed at 3,914.2 points.

Investors are concerned that the central bank may raise interest rates again soon. That caution increases towards the end of the week as the bank often announces policy changes late on a Friday afternoon.

But the Government’s announcement this week that it planned to issue $200 billion-worth of yuan bonds to finance purchases of foreign exchange from the central bank for a new overseas investment agency was another factor. Investors are worried that large sales of government bonds could suck funds from the stock markets.

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