OPINION

The Role of Risk

China should keep an eye on debt risks. In an increasingly volatile financial market, risks may have positive effects, as market participants can better weigh risks and returns, and respond to changes in a more accurate way.

Recent financial reforms, such as the central bank's policy on deposit certificates in the interbank market and the initial public offering (IPO) registration system adopted by the China Securities Regulatory Commission, let risks better play their role in guiding microeconomic behavior and resource allocation.

The market is fraught with uncertainties, or more specifically, risks. Just like prices, risks can also guide resource allocation. While prices reflect the supply and demand situation, risk mirrors the games between market participants and the market.

Individual market participants tend to maximize their profits by making decisions according to available price information. Without regard to risks, problems like overcapacity, bubble expansion, misallocation of resources and environmental pollution will surge.

It's not rare to see economic behavior go against the principle of sustainable development without fully recognizing the role of risks.

As a result of strict interest rate control, many Chinese banking institutions are engaged in boosting the expansion of loans, rather than fostering inherent innovation and business diversification. Chinese banking institutions all have similar businesses and scale expansion is still their sole pursuit.

The securities industry has the same problem. Although the regulatory authority has formulated delisting rules and asked public companies to improve dividend distribution, very few companies have been delisted. Some floundering listed companies managed to survive through reorganization. The lower risks of delisting, to some extent, encourage speculation.

All these indicate that it's urgent to create an environment for financial market participants to make decisions based on existing risks, which requires interest rate liberalization, risk-based pricing of capital and financial institutions' prudential operations. It also needs the deposit insurance system, a financial safety net and differentiated operations of financial institutions. Beyond that, a delisting system should be set up to strengthen external controls and strike a balance between risks and returns.

Efforts should also be made to implement the IPO registration system, nurture qualified securities investors, set up an investor-oriented price discovery mechanism, and strengthen supervision to realize more efficient resource allocation in the securities market.

In short, a risk-proof financial market is just like a pool of stagnant water. Financial reforms should be pushed forward in setting up a financial safety net, eliminating regional and systematic financial risks, and urging market participants to make decisions on their own while considering possible risks. Only in this way can the market play a dominant role in allocating resources and the quality of economic development be improved.

This is an edited excerpt of an article by Xiang Zheng, a financial commentator, published in Securities Times

THE MARKETS

Massive Refinancing

Ten banks announced a refinancing plan worth as much as 348.2 billion yuan ($57.3 billion) this year, implying great pressures on capital flow in the banking industry, Beijing-based Securities Daily reported.

China Minsheng Banking Co. Ltd., Industrial Bank Co. Ltd., Bank of Chongqing Co. Ltd., Huishang Bank Co. Ltd., and China Everbright Bank Co. Ltd. were some of the banks to carry out refinancing.

More than 200 billion yuan ($32.94 billion) will be generated by sub-prime loans, relieving the capital crunch of many commercial banks.

Industrial and Commercial Bank of China Ltd. announced in January 2013 that it would issue no more than 60 billion yuan ($9.88 billion) of sub-prime loans before the end of 2014.

In July 2013, Bank of China Ltd. also announced that it will issue no more than 60 billion yuan in sub-prime loans.

China Everbright Bank gained approval to issue no more than 16.2 billion yuan ($2.65 billion) of sub-prime loans in September 2013.

Loan for Sinopec Firms

On December 24, China Petrochemical Corp., also known as Sinopec, announced that it had helped its two subsidiaries to land a $3.5 billion syndicated loan.

To be used by Tiptop Energy and Sinopec Century Bright Capital Investment for general corporate purposes, the loan rate has a margin of 1.23 percent above Libor, or the London Interbank Offered Rate. Sinopec said it gave an "unconditional and irrevocable" guarantee on the loan.

China Construction Bank, the Bank of Tokyo-Mitsubishi, Citi, HSBC, Royal Bank of Scotland, and United Overseas Bank were hired as underwriters and book runners.

To cater to strong market demand, the loan was increased to $3.5 billion from the original $2.5 billion. 

NUMBERS

$10.82 bln

Total amount raised by 47 Chinese companies that launched initial public offerings (IPOs) on overseas markets from January to November 2013

39

The number of Chinese companies that launched IPOs on the Hong Kong stock exchange from January to November 2013

$2.96 bln

Total amount raised by Chinese financial institutions that launched IPOs on overseas markets

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