BEIJING • Underground banks in China did more than one trillion yuan (S$213 billion) in transactions last year and the government will step up efforts to combat the problem this year, state media said yesterday citing the foreign exchange regulator.
China's economic slowdown and market volatility have sparked a wave of capital outflows running into hundreds of billions this year, triggering alarms for its foreign exchange management system.
Mr Zhang Shenghui, head of the State Administration of Foreign Exchange's inspection division, told the Xinhua news agency his department last year participated in breaking up more than 60 underground banks suspected of doing more than one trillion yuan in transactions.
The regulator will also demand that regular banks increase their oversight of any suspicious activities, and will look more closely at securities, insurance and third-party payments providers, he said.
Last year, police, the central bank and the foreign exchange regulator busted China's biggest underground banking case involving transactions totalling US$64 billion (S$89 billion).
Separately, China's central bank governor Zhou Xiaochuan was quoted as saying yesterday that speculators should not be allowed to dominate market sentiment regarding China's foreign exchange reserves and that it was quite normal for reserves to fall as well as rise.
China's foreign reserves fell for a third straight month last month as the central bank dumped US dollars to defend the yuan and prevent an increase in capital outflows.
In an interview carried in the Chinese financial magazine Caixin, Mr Zhou said yuan exchange reforms would help the market be more flexible in dealing with speculators.
There was a need to distinguish capital outflows from capital flight, and tight capital controls would not be effective for China, he said. China has not fully liberalised its capital account. He added there was no basis for the yuan to keep depreciating, and China would keep the yuan basically stable against a basket of currencies while allowing greater volatility against the US dollar.
The government also needed to prevent systemic risks in the economy, and prevent "cross-infection" between the stock, debt and currency markets, he said.
The comments came after China reported economic growth of 6.9 per cent last year, its weakest in 25 years, while depreciation pressure on the yuan adds to the case for the central bank to take more stimulus measures over the near term.
A slew of economic indicators has sent mixed signals to markets at the start of the year over the health of China's economy.
Activity in the services sector expanded at its fastest pace in six months in January, a private survey showed on Feb 3, while manufacturing activity fell to the lowest since August 2012.
REUTERS
