China move props up banks, financial markets

China is moving to support its state-run banks and financial markets, with a government investment arm purchasing shares in the four biggest lenders as worries mount over debt and slowing growth.

Central Huijin Investment, an arm of the government wealth fund China Investment Corp., announced it bought shares in the four big banks after the benchmark Shanghai Composite Index closed at its lowest level in more than two years on Monday, losing 0.6 percent to 2,344.79.

The government intervention in the stock market is also meant to counter growing concern over a debt crisis among China's small- and medium-sized businesses at a time when bank liquidity is stretched by central bank requirements to hold record levels of reserves to help counter inflation.

While the central bank has been striving to sponge excess liquidity out of the economy unleashed by massive stimulus spending, some industries face a drought of capital that has caused thousands of smaller manufacturers to shut down.

The problem is seen as worst in the capitalist enclave of Wenzhou, where dozens of factory owners reportedly have fled, leaving millions of dollars in debt behind.

While Wenzhou's economy is small, its entrepreneurs are huge property investors and the country's biggest source of private capital, holding as much as the yuan equivalent of $127 billion, said Xianfang Ren, an economist at IHS Global Insight.

Sell-offs of property or shares could cause the city's problems to spread. "The likelihood of this development has increased recently, as there is growing evidence suggesting that private-sector distress has started spreading across China," Ren said in a research note.

Given its continued concern over inflation, which has been hovering near three-year highs but is expected to moderate further in coming months, China is focusing on local bailouts and credit easing to help smaller companies but is unlikely to announce new stimulus spending anytime soon, analysts say.

Central Huijin is the major shareholder in China's big state-run banks. The company said in a brief announcement on its website Monday that it bought shares in the Industrial & Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank and that it would continue its market-support operations. It gave no details about the amount of shares purchased.