Regulators' soothing words can't always do the trick

PUBLISHED : Sunday, 23 October, 2011, 12:00am
UPDATED : Sunday, 23 October, 2011, 12:00am


The nation's top banking regulator says the country's lenders have risks under control, despite concerns that massive local debts and ripple effects from failed informal lending schemes threaten the country's financial stability.

SCMP, October 21

We shall have to rely on his word for it as, true to form, he is chary of giving us any numbers in evidence of it.

One of the big frustrations of trying to determine the health of the mainland's banking system is that it publishes hundreds of statistical series of utter triviality. Did you know, for instance, that the total of financial institution loans made in Balinyou county of Chifeng prefecture in Inner Mongolia in 2009 was 789.5 million yuan?

But when you want figures that could really tell you what is happening, for instance what proportion of total bank assets now consists of non-government-related advances, you look in vain.

Yet this is one of the big questions facing the country's financial system. There are now reports everywhere across the mainland of extremely high informal interest rates charged to companies without close government links. This is not because they are bad risks, at least not necessarily. It is because money is tight despite overall loan growth of more than 16 per cent year over year.

And this argues very strongly that the government is hogging the money, which should hardly be surprising given a statutory reserve requirement of 21 per cent plus massive government-mandated stimulus lending two years ago. Also in the pot goes enforced funding of a government-mandated high-speed railway system and other government infrastructure works.

Leave alone how much of this is recoverable (probably only a fraction for the stimulus lending) the widespread complaints of loan- shark interest rates clearly indicate that smaller-scale productive enterprise is increasingly starved.

But the most that the chairman of the China Banking Regulatory Commission, Liu Mingkang, will say about this is that 'we are generally concerned' and then proclaim that 'overall risks are controllable' while keeping a close guard on hard figures to support his case.

You may argue, of course, that there is a reason for doing things this way. Keep the public in ignorance of specific difficulties facing the financial system or of specific financial institutions that may be in trouble and the public will not stage any bank runs.

This reasoning led Hong Kong's financial regulatory authorities in past years to tell the public nothing. It rebounded on the banking commissioner in the mid-1980s when the public knew what banks were troubled and he did not - but that's another story. Our financial statistics are now very comprehensive. Reliable too.

The Hong Kong experience is nonetheless something that Liu would do well to bear in mind. There can come a time when soothing remarks by regulators are no longer widely believed. This can be as much of a threat to the health of a banking system as a big increase in non-performing loans.

And one must ask whether Liu can be sure the mainland's financial troubles are fully under control. All that anyone at his level of authority can really do is make sure that individual banks subject their advances to appropriate stress tests. He cannot examine each of them minutely. He cannot even employ enough qualified staff to do this.

But once the parameters of a stress test are known, individual banks can still find their way around them. The real test becomes whether an advance meets the requirements of the stress test, not whether the borrower is truly creditworthy. And no stress test can take proper account of what may happen in a financial meltdown. Advances that are perfectly defensible in ordinary circumstances turn into non-performing assets very quickly in a crash.

Thus Liu's assurance that mainland banks have an average capital adequacy ratio of 12 per cent, an assurance for which he again provided no statistical support (or precise definition), may mean little. Several countries boasted such figures just ahead of the Asian financial crisis in 1997/98 only to see this capital margin vanish in a matter of weeks.

Yes, people may not believe you if you cry 'Wolf!' too often. But they may also not believe you if you cry 'Sheep' too often. I suspect an overuse of soothing words here.