China’s banking troubles are not the same as Silicon Valley Bank, economist says

FAN Editor

A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023. – With hindsight, there were warning signs ahead of last week’s spectacular collapse of Silicon Valley Bank, missed not only by investors, but by bank regulators. Just why the oversight failed remained a hot question among banking experts, with some focusing on the weakness of US rules. (Photo by REBECCA NOBLE / AFP) (Photo by REBECCA NOBLE/AFP via Getty Images)

Rebecca Noble | Afp | Getty Images

BO’AO, China — China’s small banks have problems — but they don’t carry the same risks as those exposed by the collapse of Silicon Valley Bank, said Zhu Min, vice president of the China Center for International Economic Exchanges, a state-backed think tank.

Issues at a handful of smaller Chinese banks have emerged in the last few years.

Baoshang Bank went bankrupt, while some rural banks in Henan province froze accounts, prompting protests by customers worried about their savings.

Those banks’ problems reflect local issues, Zhu said Wednesday. He pointed out that while those Chinese banks’ structure and operations were unclear, they did not pose systemic risks to the broader economy.

After the last three to four years of Chinese regulatory action, the situation has also improved, Zhu said.

China’s major banks — known as the big five — are owned by the central government and rank among the largest in the world.

On the other hand, SVB reflects a macro risk, Zhu said, noting the U.S. mid-sized lender had adequate capital and liquidity before it collapsed.

Macro risks present a much more worrisome problem, he explained. The banking crisis in the U.S. involved a structural risk from savers moving funds to take advantage of higher interest rates, Zhu pointed out.

The U.S. Federal Reserve has aggressively hiked interest rates in an attempt to ease decades-high inflation in the country. The U.S. dollar has strengthened against other currencies, while Treasury yields have risen to multi-year highs.

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The current U.S. banking problem contrasts with the 2008 financial crisis that stemmed from Lehman Brothers’ exposure to mortgage-backed securities, he added.

Zhu, formerly deputy managing director of the International Monetary Fund, was speaking with reporters on the sidelines of the Boao Forum for Asia on Wednesday. The annual event hosted by China is sometimes considered Asia’s version of Davos.

The forum this year emphasized the need for cooperation amid global uncertainty — and highlighted China’s relative stability in its emergence from the pandemic.

China’s economy in 2022 grew by just 3%, the slowest pace in decades, as the real estate slump and Covid controls weighed on growth. The country ended its stringent zero-Covid policy late last year, and has been trying to attract foreign business investment.

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Consumption remains a clear weak spot in China’s economy, Zhu said. He expects advanced manufacturing and China’s push for reducing carbon emissions to remain growth drivers.

Private, non-state-owned companies have taken the lead in China’s so-called green transformation, Zhu said.

Chinese President Xi Jinping and new Premier Li Qiang have spoken repeatedly in the last few weeks about support for privately run businesses.

Xi has said he saw increased unity under the ruling Chinese Communist Party as necessary for building up the country.

New rules released this month give the party a more direct role in regulating China’s financial industry.

Zhu said he expects this overhaul to streamline financial oversight, and warned of a period of adjustment. However, he said that overall, it would make financial regulation more efficient and transparent in China.

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