BEIJING, Feb 26: A Chinese watchdog on Tuesday warned foreign banks against violating foreign exchange rules, in a signal that the government was mulling a move to curb speculative capital inflows.

“Some foreign banks have ignored compliance requirements, are weak in disciplining themselves and are not checking the authenticity and implementation of China’s forex regulations,” Deng Xianhong, vice head of the State Administration of Foreign Exchange (SAFE), said at a forum.

“This kind of behaviour not only increases risks of the banks themselves, but may result in higher systematic risks in the banking system and eventually hurt the economy and have negative effects.”

In June last year, SAFE announced that it had disciplined 29 banks, including 19 domestic banks, for assisting foreign speculative capital to enter China’s stock and real estate markets disguised as “trade or investment.”

It said the funds had a “definite” impact on China’s macroeconomic conditions, pressuring the central bank’s monetary policy operations and the international balance of payments.

Authorities in China have become alarmed as the stock market and economy has boomed in the past few years, with the country awash in money that has increasingly driven speculative investment in many asset classes.

Such inflows have sharpened amid expectations that China will allow the yuan to appreciate against the US dollar by up to 10 percent this year, analysts said.

She Minhua, a Shanghai-based banking analyst with CITIC securities, said tighter monetary policy was restricting domestic lenders, but that foreign banks embarking on Chinese yuan business had a freer hand to circumvent banking rules.

“Currently the macroeconomic control environment and the tight monetary policy in China has led to some big restrictions in many areas like banking loans,” She told AFP.

“But it has been difficult to use these kinds of direct supervision tools on foreign banks.”

—AFP