Many financial institutions should go bust, China central bank researcher says
Xu Zhong, chief analyst at People’s Bank of China, says lenders are being kept wrongly afloat because certain authorities ‘don’t want to open the jar’
Many Chinese financial institutions should have been closed because their existence is only adding risks to the country’s overall financial system, a senior researcher at China’s central bank has said.
Xu Zhong, the head of research at the People’s Bank of China, said in a speech on Thursday China was in urgent need of letting some problematic financial institutions, including regional ones, go bust. But vested interests from local governments prevented it.
“Not a single Chinese financial institution has gone bankrupt ... are China’s financial institutions really so good that not even a single one has gone bust?” Xu asked in a speech at Peking University. “The real problem is that some authorities and local governments don’t want to open the jar.”
With a decade of monetary easing, China has created a bloated financial industry that Chinese President Xi Jinping views as a key source of risk. Regional banks often serve as tools for the local government to keep local state firms afloat and a source of financing for infrastructure projects, making it nearly impossible for regional banks to go under.
China’s central bank launched a deposit insurance system two years ago, a step that paves the way for deposit-taking institutions to file for bankruptcy. However, efforts to instil market discipline have proved futile.
“When we tried to tackle a few risky places, everyone involved was scared” and began to ask questions such as “is my economy not good” or “is my regulation too lax”, Xu said. “Since small risks are not allowed to be addressed, moral hazard is created.”
China had 4,261 banks at the end of 2015, according to the latest data from the banking regulator. But among them, only big five state lenders, namely the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications, as well as 12 commercial joint-stock banks are regarded as systemically important institutions.
Xu’s comments reflect the central bank’s dilemma in addressing the risks. On one hand, the central bank has to gradually withdraw liquidity to cut excessive leverage, but on the other, any monetary tightening could rattle the markets and cause a credit crunch.
Huang Yiping, an academic member of the monetary policy committee, an advisory body to the PBOC, said China had been racking up debts quickly to ensure economic and financial stability in recent years “without true market discipline or prudential macro supervision mechanism”.
Peng Wensheng, the global chief economist at Everbright Securities, said Beijing should have the confidence to withstand painful but necessary market turbulence.
“The PBOC shouldn’t intervene every time there’s market fluctuation, nor should it come to the rescue every time the market is yelling for help.”