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Former Chinese finance minister Lou Jiwei attacks regulators for ‘failing to act above risk’
Former Chinese Finance Minister Lou Jiwei criticized the country’s financial regulators, saying they had ignored systemic risks. In a speech delivered at the 50 China Wealth Management Forum in Shenzhen on Sunday, Lou highlighted a number of regulatory flaws in the supervision of banks and bonds. markets and warned that the country’s mounting debt threatens the economy. He said the country’s central bank had failed to take precautions against systemic risks, citing its handling of the Baoshang Bank collapse last year and recent bond defaults by several state-owned companies as examples of poor regulatory oversight. Get the latest insights and analysis from our Global Impact newsletter on the great stories originating from China. “According to the current institutional arrangements, the People’s Bank of China is responsible for prudent supervision, but obviously did not take preventive measures before and after, for example, the reports on the bankruptcy of the Baoshang Bank, which was bailed out for 170 billion yuan [US$26 billion] from the deposit insurance fund, ”Lou said, according to a transcript posted on the news portal Sina.com. House prices in China stubbornly defy ‘gray rhino’ bank risk warnings “Baoshang Bank has long had serious problems with key issues such as governance structure, asset quality, the adequacy ratio of the capital, etc. [The bank had been] ignoring it and the risk just exploded. ” Lou said he opposed the use of public funds, such as the state-backed deposit insurance fund, to help failing banks without devising a clear exit plan because such a move can widen the fiscal deficit. He also warned that this creates a moral hazard as there is no oversight by the National People’s Congress and the public. The central bank intervened to bail out several small banks last year using state funds, allowing Baoshang to become the first commercial bank in China to declare bankruptcy in nearly 20 years in August this year. In January, Shandong-based Hengfeng Bank, which had been undergoing restructuring since 2017, received 100 billion yuan of strategic investment through a sale of shares to state and foreign investors. Much of the state money invested in these banks will be recovered. He also warned against rapid growth in public debt this year as a result of fiscal and credit expansion to cope with the impact of the coronavirus pandemic, pushing China’s global debt-to-GDP ratio to more than 260 percent. Lou has been calling for an orderly exit from stimulus and a return to deleveraging to reduce financial risks and asset bubbles. “The macro leverage ratio should be stabilized and gradually decrease,” Lou said. “The investigation and cleanup of high-risk institutions and the mess of the financial infrastructure must continue.” Lou, a vocal critic of the government’s economic policy who is currently the chairman of the foreign affairs committee of the National Chinese People’s Political Consultative Conference. The Committee said that reforms in the bond market have lagged behind and that recent defaults by state-owned companies are the result of inconsistencies caused by the involvement of multiple regulators. Coal & Electricity, unexpectedly defaulted on payments, dragging several banks, rating agencies and accounting firms. “Since the beginning of this year, bond defaults have occurred frequently, especially the defaults of large SOEs, which have affected the credibility of SOEs and governments in the relevant regions.” The first problem is that the market is segmented. and issuance and supervision are not unified. The issuance review includes the China Securities Regulatory Commission, the People’s Bank, and the National Development and Reform Commission. ”“ In addition, most of the bonds on the interbank market are held by banks in bulk. Commercial banks underwrite and maintain [bonds]and the market liquidity is scarce. Once the debt goes into default, commercial banks suffer. “There are still many problems in the bond market, and the basic condition is to have a unification of the standards of issuance, circulation of transactions and regulatory mechanisms,” said Lou. China warned of an “ avalanche of defaults ” as local government debt will expire, adding that regulators should standardize regulations between the interbank bond market and the exchange-traded securities market. He went on to suggest that China could restrict the number of banks per fintech platform can partner to prevent any one platform from gaining too much market share and becoming “too big to fail.” China’s regulators last month warned the country’s tech companies that they will face closer scrutiny. Then a planned $ 37 billion stock listing for Ant Group, which would have been the world’s largest initial public offering, was abruptly suspended. Ant Group is a subsidiary of Alibaba, which also owns the South China Morning Post. “The recent meeting and the suspension of trading on a certain financial data platform are actually to prevent systemic risks before and during the event. This is the key point. China Moves to Bring US $ 12.9 Trillion Shadow Banking Out of Darkness “If systemic risks have exploded and the government has to bail them out, taxpayers may lose money,” Lou said. He also suggested that China could copy the US Equivalent Financial Stability Supervisory Board model to identify and monitor risk. He said the structure of the council, headed by the Secretary of the Treasury, was more appropriate to handle the task because the Treasury is responsible for safeguarding taxpayers’ money. “Our country lacks a mechanism to analyze risks in multiple fields and resolve them before and during the event,” said Lou. More from the South China Morning Post: * Is China Ready for a Subprime Crisis? The regulator sees bank real estate lending as the ‘biggest gray rhino risk’ to the financial system * China debt: local government default risk rises as authorities scramble to repay credit South China Morning Post To learn about Latest news from the South China Morning Post, download our mobile app. Copyright 2020.
