Many financial institutions should go bust, China central bank researcher says

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.