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China Lifts Withdrawal Cap on Banks in Shenzhen

Banks in the southern Chinese city of Shenzhen have scrapped a cap on cash withdrawals by residents that had aimed to curb money laundering and illicit fund flows into the stock market in neighboring Hong Kong.

A local central bank official told Reuters that Chinese Prime Minister Wen Jiabao had ordered the removal of the restrictions, which had encouraged a selloff in Hong Kong stocks last week.

But lenders would still limit daily withdrawals of "large sums of cash", the official said, declining to elaborate further.

Almost half the money leaving China's banking system flows through Shenzhen, a hotbed for underground banking activities, official media have reported, citing figures for the first nine months of this year. Such outflows have climbed steeply since 2001.

"Shenzhen's commercial banks have actively responded to Premier Wen's instruction, and have scrapped the withdrawal restriction," the official, at the Shenzhen branch of the People's Bank of China, told Reuters by phone.

The central bank in Shenzhen ordered banks early this month to limit their daily maximum cash withdrawals by individuals to 30,000 yuan ($4,041), bank officials have told Reuters.

Wen said on Monday that China needed to combat illegal fund flows in Shenzhen, which could harm the financial stability of mainland China and Hong Kong, but that the cap on withdrawals at commercial banks was in appropriate.

"Of course, regarding the management measures, we do not agree with the current approach," he told reporters during a visit to Singapore for the ASEAN Summit.

The China Securities Journal reported on Wednesday that lenders in Shenzhen had received an internal notice to cancel the bank withdrawal cap immediately.

Banks should "secure enough cash supplies on the counters and keep 24-hour operations on all the automatic teller machines", the official newspaper quoted the internal notice as saying.

The newspaper previously reported that the policy was designed to curb the flow of money into Hong Kong after Beijing announced this month it would delay a scheme to allow mainland individuals to invest directly in the Hong Kong stock market.

Because China's currency is not fully convertible, mainland investors are technically barred from directly trading in overseas-listed stocks.

But many mainland residents, especially in Shenzhen, have traveled to the former British colony to open stock accounts there. Foreign investors have also skirted China's capital account restrictions to pour large amounts of funds through Shenzhen into the Chinese A share market and property sector.