Bailing out banks does not help - Victor Shih

The scandal that rocked the once-famous private Minsheng bank has put the question of the role of the government towards the banking system. Bailing out banks create more problems than it solves, says financial analyst Victor Shih to the New York Times.

The New York Times:

But those bailouts create their own challenges. Investors, assured that the government will come to the rescue, do not worry about the potential risks and continue to pour money into the products. According to the state news media, Chinese investors have put $4.4 trillion into wealth management products, equivalent to about 40 percent of the country’s annual economic output. 

“It invites moral hazard,” said Victor Shih, an associate professor at the University of California, San Diego, who specializes in the politics of Chinese banking policies. 

“When you tell people that they will get bailed out, then they will engage in very, very risky behavior and also opportunistic behavior on the part of the banks.”

More in the New York Times.

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China allows private banks, very slowly - Sara Hsu

Sara Hsu

China´s financial authorities have started to allow the first private banks, in a sector where up to recently only state-owned banks dominated the banking sector. A positive sign for reform, writes financial expert Sara Hsu in the EastAsiaForum. But a very, very modest one, she adds.

Sara Hsu:

But the move is also cautious. There are many individuals and corporations that would gladly choose a bank loan over financing in the informal curb market — where private money lenders often charge high interest rates — but cannot obtain it, and three to five banks won’t be enough to satisfy demand. There are many Chinese entities interested in setting up private banks that are unable to secure permission from the central government to begin operations. In the face of the immense market pressures for additional funding, the creation of merely a handful of banks is quite conservative. 

Since 1979, the central government has almost always been cautious in opening up its financial sector. Whether this has been justified is not clear, since there are few examples to work from. One that justifies caution is Minsheng Bank, which is one of two private banks in China and is systemically important. The bank has been seeking better profitability in recent years, inducing it to take on what some critics call an excessive involvement in the sale of wealth management products. These products — of which the ultimate debtors are technically bank customers, but in practice may, over time, turn out to be the banks themselves — have been increasingly based on risky income streams from trust loans and other questionable assets. Minsheng may be left either with a poor reputation or an exhaustion of capital if these risky products go sour.

More in the EastAsiaForum.

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