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Crisis Focus
Special
UPDATED: April 18, 2009 NO. 16 APR, 23, 2009
Banks Sparkle
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There is no doubt that China's banking system is a calm port in the global financial storm. Moreover, a great regulatory firewall and an easing monetary environment have enabled Chinese banks to increase lending and help shrug off the economic downturn. Yi Xianrong, a researcher at the Institute of Finance and Banking under the Chinese Academy of Social Sciences, discussed this topic in a recent article in the Shanghai Securities Journal. Edited excerpts follow:

Around three years ago when speculative euphoria filled every corner of global financial landscape, Chinese regulators smelled the hidden risks of excessive liquidity. They made a decision that later benefited their banks-a clampdown on the risky activities of commercial banks.

China escaped the crisis but still felt its ripple effects as domestic economic growth ran out of steam. To kick-start the stagnant credit markets, China repeatedly cut interest rates while the United States directly injected cash into the banking system. But the outcomes of both situations were completely different.

According to the U.S. Federal Reserve, the basic money supply increased to $1.7 trillion in January 2009 from more than $800 billion in September 2008, but the money multiplier fell to five from nine. That means the banks have skimped on lending despite a huge liquidity injection. The credit freeze rubbed salt into economic wounds, forcing up the default rate of enterprises. The commercial banks, therefore, become increasingly reluctant to part with cash, which in turn further worsened the credit situation. The U.S. financial markets were trapped in a vicious cycle.

The biggest challenge facing the U.S. banking industry is how to rebuild the credit foundation that was shell-shocked by the crisis. Only when credit resumes its normal flow can the economy set foot on a path of recovery.

In striking contrast, China's economic slowdown has remained limited and manageable despite a heavy blow to exporters. A tightly regulated financial system has provided a firm backstop to the spillover of downward pressures.

China's fledgling financial system has yet to improve in terms of marketization and efficiency. But government regulations and implicit state guarantees have underpinned its credit foundation, keeping potential risks to a minimum. Moreover, the Chinese banks rely on loan interest for most of their profit. As a result, when the credit curbs abate, they will be highly motivated to expand their lending.

In recent years, Chinese banks have reported torrid growth in profit and continuously lower bad loan ratios. The first few months of this year in particular saw an outpouring of new loans. Yet, we should still keep a close watch over the banking system. The government has also been paying close attention to the recent credit expansion and pledged more measures as a defense against market risks.

The banks should also seek to strike a balance between stimulus and risk aversion to prevent a possible new round in the financial crisis.



 
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