2014-04-21

Solid Roundup on China Financial Reform and Difficulties

Article is very long, here are a couple of snips.

Is China Really Prepared to Shift to Market-Driven Interest Rates?
Is Buddhist images of any kind are scarce at the imposing headquarters of the People's Bank of China (PBOC), at the diagonally opposite corner of Beijing's Second Ring Road, where Governor Zhou Xiaochuan and his team of technocrats are engaged in "China's riskiest and most important credit experiment in recent history," as one Shanghai banker described it to me.

"The leaders on the Standing Committee of the Politburo are backing the reformers at the PBOC to let the market set interest rates, so that these rates reflect the credit risk of the borrowers," explained the banker, who was reluctant (as are many China sources right now) to go on the record. The team of former president Hu Jintao "gave lip service to this goal but didn't back the PBOC when push came to shove. This time I think they're serious at the top," he added.
That has been the position here.

One view, the prevailing opinion among the experts in China I spoke with earlier this month, says that it is indeed possible to gradually dismantle China's long-standing system of financial repression and organically grow a new risk-priced market for credit in parallel with the existing state bank- and SOE-allocated credit structure. A Hong Kong-based private equity CEO described this as the "one system, two markets" view, a wry reference to Hong Kong's status as a Special Administrative Region, whose largely independent coexistence as part of China is known as "one country, two systems."

An opposing view, more prevalent in New York and London, says, in effect, "You can't get there from here," and anxiously awaits a credit train wreck in China. "China's financial system is still insulated from external pressures; it's a domestic problem. But it's too complicated to run two huge domestic credit markets in parallel, no matter how clever the policymakers and how interventionist," warns a Shanghai-based economist. "The leakage and indirect connections between the market systems and the allocated credit systems are getting more baroque every day. The demand for capital by firms is insatiable, at any price."


.......According to the China Banking Regulatory Commission (CBRC), $1.6 trillion was invested in WMPs at the end of September 2013. No one knows exactly how much bigger that figure has grown since - which is part of the problem. The total should be around $2 trillion now, of which about a third - again, no one knows for sure - will mature this year and have to be rolled over.

Therein lies the heart of the problem: a massive maturity mismatch. WMPs are short-term instruments funding long-term assets, many of dubious quality. A typical transaction involves a "credit trust" vehicle that has a claim on the assets of a borrower, units of which are sold by big banks to individual savers as wealth management products paying relatively high interest rates.


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