Clamping Down On The Banks

Intriguing story in the Economic Observer, as reported by the AP, that China National Petroleum Corp and Sinopec are under investigation for being clients through subsidiaries of an illegal bank in Shenzhen.

Both companies have refused to comment on the reports, beyond acknowledging that the investigation is underway. The bank has been under investigation since last summer, and is now closed. It is thought to have been financing the purchase of gas by Hong Kong residents, who often drive to Shenzhen to buy gas at cheaper, state-controlled prices.

It would be unusual for a state-owned company to use such a financial institution. Small and medium sized business in the south and east use them to get round red tape.

The report comes as Beijing is again clamping down on bank lending in an attempt to rein in the runaway economy though higher interest rates and administrative guidance to banks, including foreign banks, to freeze lending until the end of the year.

Last week, the government said fixed-asset investment in factories and property was  27% higher in the first 10 months of 2007 than a year earlier, one of the highest rates in recent years. In the first nine months of the year, the economy grew at 11.5% and is on pace this year for its fastest rate since the early 1990s.

This is all more breakneck growth than Beijing is comfortable with, and which, given its still rudimentary market-based macro-economic controls, it is tackling with all the traditional tools at its disposal.

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