Will stress tests conducted on China’s financial institution help to restore investor confidence?

Thomson Reuters reported on April 04, 2014 that The China Banking Regulatory Commission (CBRC) plans to conduct stress tests on the country’s largest and rural banks. This new ruling was in reaction to the high levels of financial leverage and bad loans taken on by these financial institutions during the credit boom years where loans tied to housing, infrastructure, and factory expansions were being approved without vetting the credit profile of the borrowers. The current Chinese administration has plans to fix it, but some of the questions one might ask are whether it is too late, given that many investors have lost badly with several corporate bond defaults, soured housing loans, lack of investor confidence, among others.

According to the statement published on the website of CBRC, it stated that, “All (CBRC) offices, supervisory departments, must organise stress tests of banking institutions in a timely manner so as to analyse the impact of unfavourable situations in individual banks and the banking system and urge financial institutions to make emergency plans.” Unlike the US, the regulators do not plan to disclose the results of the stress tests. This plan does not work in the favour of the regular man on the street who places his/her savings in a financial institution knowing that there is ready access to those savings. The lack of disclosure of the results of the bank stress results is not doing a favour for depositors and investors who are heavily reliant on the banking system.

Depositors and investors might want to ask themselves whether the Chinese financial system is reliable. Will they be increasing turning to informal lending, and savings channels such as the shadow banking system? Although Chinese regulators frown on the use of the shadow banking system including the recent crackdown on internet e-commerce giant, Alibaba Holdings, investors and depositors are still shunning themselves away from utilising the services of regular brick-and-mortar banks, in favour of informal savings channels such as the shadow banking system.

In this year alone, there have been several high profile cases on trust products gone bad or near collapse such as the case of China Credit Trust Company and its trust product, named “Credit Equals Gold Opportunity Fund” that nearly bust, if not the bank rescue offered by the Industrial and Commercial Bank of China (ICBC) . However, despite the near collapse of trust products, many investors continue to patronise the services offered through the shadow banking system, ignoring the potential risks associated with the system. The Chinese government has not been able to enforce their regulatory authority on the shadow banking system. The regulators have tried to ban virtual credit cards such as Alipay offered by Alibaba Holdings, but they are not able to effectively enforce their monitoring and supervisory authorities on these non-bank corporations.

In summary, I believe that the CBRC and various other regulatory agencies are facing a tall order to properly control the potential risks arising from the existing financial system. There is a constant need for regulators to be ahead of the game, to be able to anticipate the potential risks, and to carry out the current reform agenda handed down by the Chinese government. Investor and depositor confidence are vital in ensuring trust in the overall financial system. Without the trust and confidence, including complete transparency, no investor and depositor will want to put their faith on the safety of the funds being kept in the Chinese banks.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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