There were further signs yesterday that the closure of Guangdong International Trust and Investment Corporation (GITIC) marks the start of a more widespread shake-out of the mainland's financial sector. In Shenzhen, 15 futures trading firms have been suspended from trading. Uncertainty continues to surround GITIC's Guangzhou counterpart after it missed a scheduled debt repayment.
The shake-out is starting to have serious consequences. International credit-ratings agencies are poised to downgrade other mainland investment institutions. Many companies, especially those in Guangdong, are likely to face higher financing costs. Not even the most prestigious red chips have escaped the fallout from GITIC's demise, with Beijing Enterprises having to reassure investors about its financial status.
More serious still is the possible effect on mainland banks. Beijing's decision that the People's Bank of China should take on most of GITIC's debts is a further headache for a banking system already weighed down by non-performing loans. If the shake-out continues, and similar guarantees are used to protect the bad debts of other collapsed institutions, this could place a severe burden on the shaky banking sector.
Despite all these dangers, the central Government's decisive action in dissolving GITIC is encouraging. From Japan to Indonesia, the catastrophic consequences of dithering over whether to close ailing financial institutions are only too apparent. By contrast, Beijing acted before much of the world even realised there was a problem.
The arbitrary nature of its action may cause some concern. Many investment institutions are in a far worse state than GITIC and this concentration of actions against Guangdong-based companies has led to suggestions that the province is being discriminated against.
Nonetheless, there can be little doubt that China is moving in the right direction. As yesterday's third-quarter growth figures showed, the mainland economy is in far better shape than had been feared following the devastating summer floods, and may still be able to meet its growth target of eight per cent. With Beijing's willingness to bite the bullet by closing GITIC, this offers reasons for optimism that China can come through the Asian financial turmoil in much better shape than had been feared.
