China Reduces Number of High-Risk Financial Institutions to Defuse SVB ‘Bombs’

The People’s Bank of China (PBOC), the country’s central bank, said on Wednesday that it will begin trimming back the number of high-risk financial institutions in China to avoid the risk of “bombs” like Silicon Valley Bank (SVB).

PBOC compared its reform plan to “precise bomb disposal.”

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The PBoC says it will steadily reduce the number of high-risk institutions to help fend off systemic financial risks, but how does "reducing" the number of high-risk institutions reduce systemic risk?https://t.co/3jMGGw7oBj

— Michael Pettis (@michaelxpettis) March 15, 2023

“It is necessary to strengthen the financial risk disposal mechanism and capacity building, strengthen monitoring, early warning and evaluation,” said the Chinese central bank.

PBOC chief executive Yang Gi said in early March, before the SVB implosion captured worldwide headlines, that China had already shuttered over 300 of its 600 “high-risk” institutions since the beginning of the Wuhan coronavirus pandemic. PBOC envisioned further reducing the number of high-risk banks to under 200 by 2025, bringing their numbers down to less than one percent of all Chinese banks.

High-risk banks now account for 1.04% of all Chinese banks, according to the PBOC.https://t.co/mA7KuSZWL6

— Asia Financial (@Asia_Financial) March 5, 2022

China began cracking down on risk institutions before the pandemic broke out, in part because a growing number of such institutions were not submitting financial reports on time. For example, Chinese regulators took control of an institution called Baosheng Bank in 2019 and then forced it into bankruptcy because a billionaire named Xiao Jianhua was allegedly using it as an “ATM” to pour money into dubious business propositions.

Before that, Chinese Communist regulators were worried about “shadow banking,” a term for financial institutions that lured customers into risky investment schemes with false promises of security. Shadow banking tended to flourish during times when Chinese customers could not make investments or take loans from larger institutions.

SVB failure offers lesson for China – state mediahttps://t.co/NEhN8GJmaz

— Wall St. Headline (@wallst_headline) March 15, 2023

Some of these dicey investment plans were little better than the schemes of Bernie Madoff or Charles Ponzi, using the money from new investors to pay “dividends” while capital ran dangerously low. This created the same sort of cascade default risk that American analysts fear as they watch the flaming ruins of SVB crash to the Earth, but Beijing indulged shadow banking practices for decades because much of the investment money flowed into projects desired by the government.

Chinese state media on Wednesday confidently predicted SVB’s collapse would not seriously impact China’s financial system, and no failure of comparable size could ever occur in China, but China would still “earnestly learn from this lesson, and always prioritize risk prevention and control.”