China’s banking troubles not the same as Silicon Valley Bank: economist

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A Silicon Valley Bank office is seen March 14, 2023 in Tempe, Arizona. – In retrospect, before the spectacular collapse of Silicon Valley Bank last week, there were red flags that were overlooked not only by investors but also by banking regulators. Why the oversight failed remained a hot question among banking experts, with some focusing on the weakness of US regulations. (Photo by REBECCA NOBLE/AFP) (Photo by REBECCA NOBLE/AFP via Getty Images)

Rebecca Edel | AFP | Getty Images

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

A handful of smaller Chinese banks have experienced problems in recent years.

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Baoshang Bank went bankrupt, while some rural banks in Henan province froze accounts, sparking protests from customers concerned about their savings.

These banks’ problems reflect local problems, Zhu said on Wednesday. He noted that while the structure and operations of these Chinese banks are unclear, they do not pose systemic risks to the broader economy.

After the past three to four years of Chinese regulation, the situation has also improved, Zhu said.

China’s major banks – known as the Big Five – are owned by the central government and are among the largest in the world.

On the other hand, the SVB reflects macro risk, Zhu said, noting that the mid-sized US lender had ample capital and liquidity before its collapse.

Macro risk is a much more worrying issue, he explained. The US banking crisis poses structural risk as savers shifted funds to take advantage of higher interest rates, Zhu stressed.

The US Federal Reserve has aggressively raised interest rates to ease decades of high inflation in the country. The U.S. dollar has strengthened against other currencies while Treasury returns have risen to multi-year highs.

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

Zhu, formerly deputy executive director of the International Monetary Fund, spoke to reporters on the sidelines of the Boao Asia Forum on Wednesday. Hosted by China, the annual event is sometimes seen as Asia’s version of Davos.

This year’s forum stressed the need for cooperation amid global uncertainty – and stressed China’s relative stability in overcoming the pandemic.

China’s economy grew just 3% in 2022, the slowest pace in decades, as the housing slump and Covid controls weighed on growth. The country ended its strict zero-Covid policy late last year and is looking to attract foreign business investment.

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Consumption remains a clear weak point in China’s economy, Zhu said. He expects advanced manufacturing and China’s efforts to reduce carbon emissions to remain growth drivers.

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

Chinese President Xi Jinping and the new Premier Li Qiang have repeatedly discussed supporting privately held companies in recent weeks.

Xi said he sees increased unity among China’s ruling Communist Party as necessary to build 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 will streamline financial supervision and warned of an adjustment period. However, he said that overall it would make financial regulation in China more efficient and transparent.

Correction: This story has been updated to accurately reflect that China’s major banks are known as the “Big Five”.