Not entirely at risk, the banks are covered by the borrowers' mortgages. If the borrowers suffer severe losses on stock investments, the banks can sell the collateral to retrieve part of the loans, limiting their overall risk.

Therefore, the commercial banks may not be adequately motivated to follow the CBRC orders to stop such lending.

Moreover, those who want to borrow from the banks to invest in the stock market may resort to some financial maneuvers to circumvent the banks' tracking the loans.

As a result, although the regulators have taken a harsh stance, it is hard for them to stop bank loans from flowing into the stock market simply by pressuring the banks.

The stock regulators have repeatedly reminded investors of the potential risks of the market. Although risks are intrinsic to the stock market, as long as investors expect to profit, they will find ways to obtain funds to invest.

Even if the regulators can plug the commercial bank loopholes, investors can secure money from other sources. This would make regulating such money flows even more difficult.

Other countries' experience shows that it may be better for regulators to take a more liberal stance toward such investment zest rather than trying to control the barely controllable flow of capital.

In developed countries, banking regulators generally stipulate a series of strict bottom-line rules for commercial banks to issue loans.

For example, in the United States, where the bad loan ratio is quite low compared with other countries, the banks cannot issue loans worth more than 90 percent of the mortgaged property, such as buildings.

With those requirements met, the lending risks are under control and the banks are allowed to make loans without keeping track of how the money is used. The borrowers can use the money to buy stocks so long as they meet the loan requirements.

Such a policy is obviously more in line with the development of a modern market economy. The banks are commercial entities that aim to make profits. In their own interest, they will assess the risks of making the loans and will determine whether the collateral can cover possible losses.

It will not work if regulators require the banks to shoulder the responsibility of solving the macroeconomic problem of excessive liquidity.

It is the regulators' duty to help the commercial banks to establish their own risk assessment system. They should also provide timely information for the financial institutions to make the right decisions and reduce risk.

For example, they can establish a nationwide individual credit network and a unified statistical database. This way the banks can have more information on loan applicants.

The author holds a doctorate in economics from the Shanghai Academy of Social Sciences. 

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