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In a decade China’s banks have changed from government counters for handing out money into professional financial institutions. But the recent four trillion Renminbi rescue plan might push those banks ten years back in history, writes assistant professor Victor Shih in the Wall Street Journal.

A year ago, many of us were ready to be impressed with China’s banking system. To be sure, banks were still mainly state-owned, and the Chinese Communist Party continued to be omnipresent. However, the average bank managers were extremely risk conscious, and regulators from the China Banking Regulatory Commission (CBRC) swooped down on bank branches conducting surprise inspections every so often. Bankers were extremely hesitant to make uncollateralized loans to any firm except for the largest corporations.

Now the banks got a central role in the plans by the central government to use four trillion Rmb in funding to revive the economy. Most of the funding does not come from the coffers of the central govertm but has to be provided by local governments or – indeed – commercial banks. And banks have to follow the lead of the central government, writes Shih. They might be under threat when the economy deteriorates.

Meanwhile, if the economy worsens in the first quarter the government may be tempted to abandon prudent regulation altogether. Beijing could order the CBRC to disregard risk targets or even abolish the CBRC. This would plunge China back into the old days when the only risks that bankers faced were political ones.
Without a global financial crisis, the global financial community might have criticized such a giant step back toward the planned economy. The criticism might have at least triggered some debate in China. However, with the rest of the world suffering a severe credit crunch that has seen free-market governments bailing out their own financial institutions, there are few people left who can credibly criticize China’s actions.

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Victor Shih is an leading voice on China’s financial reform and a speaker at the China Speakers Bureau. Are you interested in having him as a speaker? Do let us know.

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