Chinese Banker Pushes For Financial Innovation

The Economic Observer Online reports about a Chinese banker pushing for financial innovation.

(emphasis mine) [my comment]

Chinese Banker Pushes Financial Innovation
By Lin Li, Zuo Maohong

Though the world is still reeling from a crisis stemmed from exotic financial innovation and deregulation, that has not stopped a prominent Chinese banker from calling for quickening the pace of securitization in China.


Yang Kaisheng, president of Industrial and Commercial Bank of China (ICBC) - the world's largest and most profitable bank - held that securitizing credit assets should be the next step in China's banking reform, which had previously focused on listing banks to expand fund raising channels.

Securitization is a process of pooling and repackaging cash-generating assets into securities, which are then sold to investors to raise fund.
[US banks securatizing loans for years. Their decision to securitize subprime loans is a big reason we are in our current mess.]

"The global financial crisis can be traced back to the sub-prime and over securitization; but that should serve as a good lesson, not a factor to shake our determination or confidence in pushing for further financial reform and innovation," Yang said at the Observer Forum held in Beijing on Jan 11.

The Forum - with speakers ranging from policymakers, enterprenuers to scholars - was organized by the Economic Observer to discourse on the economic action plan for 2009.

Yang reasoned that the government's recent push for agressive fiscal spending and looser credit policies would eventually lead to drops in banks' capital adequacy ratio (CAR) - a measure on bank's ability to cushion potential losses.

He added the banks needed more fund generating channels through creative financial products, as the banks' long term survival could not depend largely on continual cash injection from the government to maintain the CAR demanded by international stadard - which the Basel Agreement set at 8%.

As to how to avoid repeating the failed US experience, Yang said as long as the principal and interest were controlled above the future income of the assets, the risk of these asset backed securities (ABS) would be small. To minimize risks, he also proposed to classify the securities according to their yields and risks.

China started experimenting credit assets securitization since 2005. Construction Bank of China and China Development Bank were the first to issue ABS.
[asset backed securities]

After the financial crisis spread across the world, some observers - both foreign and domestic - held that
China's resilient in weathering the storm, and the fact that it's economy was not slowing down as fast as the other major economies, should be credited to its state meddling and a lack of innovative financial products.

The viewpoint had led to a rise in cautionary calls against market economy, market reform and innovation, and the appeals of state intervention seemed to have increased.

Against such a backdrop, China's leading economist Mao Yushi took the audience at the Observers' Forum down a memory lane to reflect on how the nation embarked on the path to market-oriented economy some 30 years ago.

In short, he summed up the experience: "The market system has proven to be a reliable mechanism, though it is still ridden with many problems, it basically manages to make full use of all resources. The question we should ask today is not that have we chosen the right path, but how do we improve the system."
[With enough "improvements", Chinese banks can one day hope to emulate the fantastic success of American financial institutions]

My reaction: This highlights the world of difference between US banks and Chinese banks. In the US, banks are running away from financial innovation while screaming. In China, banks are headed towards financial innovation with "determination".


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