Who wants a deposit insurance?
2014-06-02 16:28阅读：
Beijing needs to turn off the credit tap
Government barking up the wrong tree with tighter
regulation and deposit insurance scheme
Joe Zhang, SCMP, 1 June
2014,
China’s shadow banking is opaque, huge and fast-growing. In
the past year, it has managed to cause two interbank crises, a few
small-scale bank runs and several high-profile defaults and
near-defaults of bonds.
This has all proven to be enough fun for the government,
which in recent weeks has signalled a two-pronged response: tighten
regulation and introduce a deposit insurance scheme. Unfortunately,
both plans are misguided, in my view.
First, both are forms of prudential supervision, but shadow
banking in China is largely a by-product of an ultra-loose monetary
policy.
At the beginning of 2008, China’s money supply was equivalent
to only 74 per cent of the correspond
ing figure in the United States.
Just six years later, however, it is 61 per cent bigger,
although the US economy is still 83 per cent larger than
China’s.
Apart from a currency translation effect, China’s rapid
credit growth is the key reason behind this reversal. It has taken
place despite the quantitative easing in the US.
If China is really worried about shadow banking, there is a
neat solution: turn off the credit tap and/or raise interest rates
on bank deposits by 1 to 2 percentage points.
Sadly, the government is reluctant to take the right action.
Today, China’s money supply is still growing at more than 13 per
cent off a very high base. Anyone who understands the power of
compound growth should be concerned.
In March, Zhou Xiaochuan, the governor of the People’s Bank
of China, said China would set interest rates free “within a year
or two”.
We have heard similar words again and again in the past two
decades. Do not hold your breath for a paradigm shift.
The government’s vow to strengthen regulation of shadow
banking is nothing new. It is a habitual response when something
unpleasant happens.
But regulating shadow banking is easier said than done. When
hundreds of millions of citizens participate in shadow banking for
legitimate reasons (chasing yields, or meeting needs neglected by
the banks), the government’s risk control rhetoric rings
hollow.
Introducing deposit insurance has long been a piece of
the pie on the Chinese government’s very full plate. But why the
sudden urge to actually implement it?
My take is that the government wants to instil more public
confidence in the very bloated banking system, and at the same time
punish poorly managed banks.
This all sounds sensible, but it is a bad idea. In the past
65 years, the Chinese public has been well served by an implicit
deposit insurance system.
It is true that this system rewards poorly managed banks and
creates a “moral hazard” for depositors. But explicit deposit
insurance systems seen elsewhere are equally troubled by moral
hazard.
Charging different banks different insurance premiums on the
basis of their risk profile sounds elegant, but no country on this
planet has shown its capability to implement it well.
A cap on the insured deposit sums will simply force
depositors to deal with multiple banks and shift money between the
banks.
Moreover, self-confident regulators from the US to Spain have
consistently failed to spot troubled banks before a disaster hits.
So why should we expect ordinary citizens to be able to do
so?
My advice is that the government should not do something just
to do something. The existing system of implicit insurance of
deposits is just fine.
While it provides de facto blanket coverage for all deposits,
the lack of an explicit guarantee is a constant reminder to all
depositors that some caution is advisable on their
part.
Sadly, that is all a deposit insurance scheme can
realistically achieve anywhere in the world, no matter how
elaborate it is.
Last month, the Chinese government issued a set of guidelines
for banks to issue preferred shares. I think that is a step in the
wrong direction.
It is true that rising bad debts may have eroded the banks’
capital cushion, but giving them more capital is adding fuel to the
fire.
Without writing off bad loans, the banks will be emboldened
and fooled by their suddenly higher capital adequacy ratios and
extend even more loans. More loans, in turn, will lead to more bad
debts and will require more capital replenishment.
The 18 publicly listed banks and thousands of unlisted banks
have all gone through the same drill and gotten fatter and weaker
along the way.
Now a very un-Chinese approach is needed urgently. The
banks must learn to downsize their loan portfolios (or at least
slow the growth of them) to meet their capital ratios.
The capital markets inside and outside China price the
Chinese banks at below book value despite their enviable
operational and valuation ratios.
The banks do not need more capital. They need a smaller loan
book.
None of the troubles in China’s banking industry today is due
to credit tightening, which is not in the Chinese government’s
vocabulary. On the contrary, it is all due to excessive credit
expansion.
Sensible lending opportunities cannot possibly grow at
double-digit rates year in, year out, several decades in a
row.
The rapid growth of credit naturally leads to lower
standards, diminishing returns and rising bad loans. That’s the
reality in China today.
The government must come out of denial and deal with the
issue head-on, rather than diverting energy to tangential matters
such as regulation, deposit insurance and preferred shares.
Joe Zhang is the author of Party Man, Company
Man: Is China’s State Capitalism Doomed?
http://www.scmp.com/business/banking-finance/article/1523676/beijing-needs-turn-credit-tap
