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09-06-2013, 10:04 PM
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16 April 13
Global Insight: Debt threat to China’s financial system
By Jamil Anderlini in Beijing
China’s banking system is more likely to erode slowly than collapse
Thanks partly to a lack of transparency by the Chinese authorities and partly to ignorance from the rest of the world, economic headlines emanating from Beijing tend to cause panic and euphoria in equal measure and rapid succession.
So a slowdown in Chinese growth in the first quarter and the increasing realisation that China has entered a new period of slower economic expansion have shaken global markets in everything from commodities to currencies over the past two days.
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• Missed China revenues spark complaints
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In the wake of the first-quarter dip, fears of an imminent financial crash have proliferated. But a cursory examination of how China works should help put those fears to rest for now.
When we think of an archetypal financial crisis we usually think about it in terms of a catastrophic and rapid loss of faith in the soundness of a financial institution or system.
To simplify things, we can divide financial crises into three categories.
In the most recent example in 2008 the crash came with a run on previously rock-solid institutions such as Lehman Brothers by other institutions as they suddenly decided there was nothing really backing the piles of clever financial instruments they had all accumulated.
In 1997, we saw another category of crisis unfold when global investors lost faith in countries and pulled their money out of Asian tigers and dragons such as Thailand and South Korea.
The third category of crisis – a public run on one or more financial institutions – has been around for as long as people have been lending money to each other and was most recently seen in Britain with the run on Northern Rock in 2007.
None of these traditional systemic financial crises can happen in China.
First, all large Chinese financial institutions are majority owned and directly controlled by the state, with senior executives appointed by the ruling Communist party.
A Lehman-style collapse is impossible because to avoid it the government would just have to call in the heads of all the major banks and order them to start lending to each other again.
As for the prospect of a run by global investors, China’s strict capital controls make that very difficult, while $3.44tn in foreign exchange reserves gives Beijing ample firepower to defend its currency and system even if money can leak out.
The third scenario, which envisages a run on financial institutions by businesses and individuals, is also constrained by capital controls and state ownership of banks.
If you suddenly lose faith in Industrial and Commercial Bank of China why would you still have faith in China Construction Bank or Bank of China since they all have the same owner and are all run by roughly the same bureaucrats?
Since the banks are effectively backed by the full weight of the Communist party, the public would have to lose all faith in it in order to flee the state banks. If the party was being toppled, a financial crisis would probably be low on the list of concerns.
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If we think of a financial crisis as a relatively brief moment in which the old order rapidly falls apart, China appears to be well insulated.
But there is another financial disaster scenario and it is one that played out in China a little over a decade ago.
Back then, the state-owned financial institutions, under orders from the party to avoid a traditional crisis at all costs, were busy rolling over, forgiving and hiding the mountains of bad loans they had built up through state-directed lending in the 1990s.
The result was non-performing loan ratios of up to 50 per cent and a clutch of zombie banks that kept on lending but created progressively less real economic activity.
Some analysts warn that a similar dynamic is at work today following the enormous expansion in lending to local governments and state-backed infrastructure projects in the wake of the global financial crisis in 2008.
Credit intensity figures in China show that more and more loans are now needed to drive lower and lower growth rates and that suggests the old games of the late 1990s are back in vogue.
It is hard to envision a calamitous collapse in the Chinese financial system, but a slow erosion is probably already under way.
Copyright The Financial Times Limited 2013. You may share using our article tools.
16 April 13
Global Insight: Debt threat to China’s financial system
By Jamil Anderlini in Beijing
China’s banking system is more likely to erode slowly than collapse
Thanks partly to a lack of transparency by the Chinese authorities and partly to ignorance from the rest of the world, economic headlines emanating from Beijing tend to cause panic and euphoria in equal measure and rapid succession.
So a slowdown in Chinese growth in the first quarter and the increasing realisation that China has entered a new period of slower economic expansion have shaken global markets in everything from commodities to currencies over the past two days.
•
•
•
•
More
ON THIS TOPIC
• Fresh data highlight sluggish China economic growth
• Ghana agrees to release detained Chinese miners
• Gabon seeks to reclaim Chinese oil assets
• Missed China revenues spark complaints
GLOBAL INSIGHT
• Global Insight Sectarian splits fuel fears of Syrian spillover
• Abe’s ‘third arrow’ leaves investors hungry for detail
• Global Insight China’s ‘great power’ call to the US could stir friction
• Obama’s limited Capitol assets bode ill
In the wake of the first-quarter dip, fears of an imminent financial crash have proliferated. But a cursory examination of how China works should help put those fears to rest for now.
When we think of an archetypal financial crisis we usually think about it in terms of a catastrophic and rapid loss of faith in the soundness of a financial institution or system.
To simplify things, we can divide financial crises into three categories.
In the most recent example in 2008 the crash came with a run on previously rock-solid institutions such as Lehman Brothers by other institutions as they suddenly decided there was nothing really backing the piles of clever financial instruments they had all accumulated.
In 1997, we saw another category of crisis unfold when global investors lost faith in countries and pulled their money out of Asian tigers and dragons such as Thailand and South Korea.
The third category of crisis – a public run on one or more financial institutions – has been around for as long as people have been lending money to each other and was most recently seen in Britain with the run on Northern Rock in 2007.
None of these traditional systemic financial crises can happen in China.
First, all large Chinese financial institutions are majority owned and directly controlled by the state, with senior executives appointed by the ruling Communist party.
A Lehman-style collapse is impossible because to avoid it the government would just have to call in the heads of all the major banks and order them to start lending to each other again.
As for the prospect of a run by global investors, China’s strict capital controls make that very difficult, while $3.44tn in foreign exchange reserves gives Beijing ample firepower to defend its currency and system even if money can leak out.
The third scenario, which envisages a run on financial institutions by businesses and individuals, is also constrained by capital controls and state ownership of banks.
If you suddenly lose faith in Industrial and Commercial Bank of China why would you still have faith in China Construction Bank or Bank of China since they all have the same owner and are all run by roughly the same bureaucrats?
Since the banks are effectively backed by the full weight of the Communist party, the public would have to lose all faith in it in order to flee the state banks. If the party was being toppled, a financial crisis would probably be low on the list of concerns.
More video
If we think of a financial crisis as a relatively brief moment in which the old order rapidly falls apart, China appears to be well insulated.
But there is another financial disaster scenario and it is one that played out in China a little over a decade ago.
Back then, the state-owned financial institutions, under orders from the party to avoid a traditional crisis at all costs, were busy rolling over, forgiving and hiding the mountains of bad loans they had built up through state-directed lending in the 1990s.
The result was non-performing loan ratios of up to 50 per cent and a clutch of zombie banks that kept on lending but created progressively less real economic activity.
Some analysts warn that a similar dynamic is at work today following the enormous expansion in lending to local governments and state-backed infrastructure projects in the wake of the global financial crisis in 2008.
Credit intensity figures in China show that more and more loans are now needed to drive lower and lower growth rates and that suggests the old games of the late 1990s are back in vogue.
It is hard to envision a calamitous collapse in the Chinese financial system, but a slow erosion is probably already under way.
Copyright The Financial Times Limited 2013. You may share using our article tools.