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25 Feb 2014
Why China cannot have a 'Lehman moment' - SCMP
FXStreet (Bali) - In an article published at the South China Morning Post by Derek Scissors, resident scholar at the American Enterprise Institute, he dismantles the myth of China potentially suffering a 'Lehman moment'.
Key Quotes
"It is not clear how China can suffer any sort of acute financial crisis. And it is extremely unlikely that, if such a crisis did occur, it would do lasting harm to the global financial system."
"The financial system is weak: maturity mismatches and other indications of financial stress will continue indefinitely. But these problems are chronic, not acute."
"The Chinese banking system is dominated by the state and a handful of state-owned insurers that generate 80 per cent of the industry's premium income. The much-hyped "shadow banking" is mostly funded by assets moved off the balance sheet of state-backed financial firms to avoid regulatory scrutiny, or is lending by non-financial state enterprises that tap state banks, then relend."
"Local government debt accumulation reflects trillions of yuan in wasted funds and may even signal a failed development model. But it consists of one kind of state entity - local government financing vehicles - borrowing from other kinds of state entities and is more like a fiscal transfer than a true credit market transaction."
"Chinese financial firms are largely owned by the same entity and run by a small set of people moved around in their posts by the party. They go bankrupt only very rarely and under very tightly controlled conditions. The result of all this: no counterparty risk."
"Here's the proof. In what was perceived to be an emergency situation five years ago, Chinese banks established beyond any doubt their willingness to set aside commercial considerations and obey political directives, lending much more as corporate profits plummeted. US President Barack Obama bemoaned the unwillingness of American banks to lend during the crisis in 2009; Chinese President Xi Jinping has no such problem. There is no chance of a Chinese credit freeze lasting longer than a few days, because orders to lend would come down from on high."
"A non-commercial system ultimately controlled by the state may be stunningly inefficient but is probably only as weak as its strongest link, since the most solvent institution can simply be commanded to absorb losses elsewhere."
"Even if a major Chinese entity did default on most of its obligations, the ripple effect across the globe would be very small. Worry as much as you want about Chinese finance, but do not worry about a Lehman moment."
Key Quotes
"It is not clear how China can suffer any sort of acute financial crisis. And it is extremely unlikely that, if such a crisis did occur, it would do lasting harm to the global financial system."
"The financial system is weak: maturity mismatches and other indications of financial stress will continue indefinitely. But these problems are chronic, not acute."
"The Chinese banking system is dominated by the state and a handful of state-owned insurers that generate 80 per cent of the industry's premium income. The much-hyped "shadow banking" is mostly funded by assets moved off the balance sheet of state-backed financial firms to avoid regulatory scrutiny, or is lending by non-financial state enterprises that tap state banks, then relend."
"Local government debt accumulation reflects trillions of yuan in wasted funds and may even signal a failed development model. But it consists of one kind of state entity - local government financing vehicles - borrowing from other kinds of state entities and is more like a fiscal transfer than a true credit market transaction."
"Chinese financial firms are largely owned by the same entity and run by a small set of people moved around in their posts by the party. They go bankrupt only very rarely and under very tightly controlled conditions. The result of all this: no counterparty risk."
"Here's the proof. In what was perceived to be an emergency situation five years ago, Chinese banks established beyond any doubt their willingness to set aside commercial considerations and obey political directives, lending much more as corporate profits plummeted. US President Barack Obama bemoaned the unwillingness of American banks to lend during the crisis in 2009; Chinese President Xi Jinping has no such problem. There is no chance of a Chinese credit freeze lasting longer than a few days, because orders to lend would come down from on high."
"A non-commercial system ultimately controlled by the state may be stunningly inefficient but is probably only as weak as its strongest link, since the most solvent institution can simply be commanded to absorb losses elsewhere."
"Even if a major Chinese entity did default on most of its obligations, the ripple effect across the globe would be very small. Worry as much as you want about Chinese finance, but do not worry about a Lehman moment."