Introspection: Chinese Baning System

Times senior reporter Michael Schuman released an article aiming at the future of Chinese economic development on February 27,2012. Schuman supposed that if china does not transform the economic development pattern, it is unavoidable that the economic crisis will be addressed in nearly future.

http://business.time.com/2012/02/27/why-china-will-have-an-economic-crisis/

Coincidentally, with World Bank President Robert B. Zoellick visiting China early this week, in one hand, he was pleased with China’s economy recovery; in another hand, he was anxious about China’s economic mode and issued that China should be urged to redefine the economic growth model in the World Bank Official site.

http://www.worldbank.org/en/news/2012/02/27/china-case-for-change-on-road-t-030

I am prudently agreed with this view. Since I have introduced some characteristics of Chinese Banking System in last blogs, but some potential problems appeared are also huge and affected profoundly.

1. The limitations of financial supervision and deregulation.

This is an institutionalized moral hazard. To say, if the state-owned departments and local governments borrow hugely and make blind expansion based on a thinly capitalized banking system, which will consequently aggravate the debt quality firstly. Furthermore, it is inevitably that the debt risk will be shifted to the banks, worsen the banks’ assets and then lay the sin on the depositors finally so on and so for. Since that all the systemic risks will be upgraded and classified as the national risks and are tied to the confidence and patience the public gives to the government. While in this way, moral hazard becomes a main growth driver of Chinese economy, but also the important source of Chinese financial systemic risk.   

2. The incapacity of withdrawing lending

This is a fundamental problem. In these years, Chinese banks come across massive bad loans and such loans are viewed as part of the bank’s assets. To solve this problem, Chinese central bank takes financial stimulus using high lending profits to replenish capital, but to my honestly, I do not think China can clean up the bad debt quickly, because the financial stimulus is only the measure masking the symptoms, but not at root.

In addition, as Chinese government does not allow the banks be bailout, in other words, there is no systemic risk in Chinese banking system, so banks can only make profits by lowering the deposit rate and increasing the lending interest, while lowering the deposit rate is “stealth taxes”. Consequently, such banking system cannot be kept on sustainable development because low interest rate will decrease the proportion the consumption in the national GDP. To say, if the government cannot satisfy the increase in the purchasing power from the consumers, it may only rely on more exports.