‘Markets will decide’ on ailing firms; Beijing will allow some financial institutions to close or go bankrupt so long as the overall financial situation is under control, a state councillor said.

February 21, 2014 Leave a comment

‘Markets will decide’ on ailing firms
Ling Wang
Wednesday, February 12, 2014
Beijing will allow some financial institutions to close or go bankrupt so long as the overall financial situation is under control, a state councillor said.

Speaking at forum in Beijing, Xia Bin said that it is difficult to balance between continuing reform and contain systemic risks that it had brought. He stressed that if poor assets remained in corporations and banks, then the economic system could never be healthy.

“Market mechanism plays a decisive role in reform, forcing poorly performing companies and banks out of the market. [This] is inevitable,” said the member of the State Council.

“It is not that financial institutions cannot fall or go bankrupt, but having the overall financial situation under control is important to avoid loss of trust among the public to the lenders or even a bank run.”

He envisaged drastic action againstindustrial and commercial enterprises that incurred excessive risks and local government debts.

Meanwhile, local government debt is expected to top 20 trillion yuan (HK$25.59 trillion) by the end of 2012. Xia said by allowing some to default meant releasing some risk and that such short-term pain could bring long-term stability.

Market watchers were recently transfixed by last month’s saga of “Credit Equals Gold #1,” a high- yielding trust product backed by a loan to a troubled coal mining firm, which looked poised to set a precedent for defaults in China’s shadow banking system.

The apparent bailout by an unnamed white knight revived concerns about moral hazard. By reinforcing the perception that even high-yield investments carry an implicit guarantee from the government and state banks, such rescues encourage reckless lending, economists argued.

In other news, China’s big four state banks tightened new lending, 21st Century Business Herald reported. Last month’s new loans for the four banks fell to 350 billion yuan, down 7.09 percent lower from a year back. The banks lost 450 billion yuan in deposits last month – the primary reason for the fall in new lending.

 

Filed under Macro Trends

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