China looks to avoid the ‘too big to fail’ trap
People’s Bank of China links up with regulators to outline plans for more stress tests in the financial sector
Back in the dark days of the Global Financial Crisis, the phrase “too big to fail” became a sign of the times. Exactly 10 years ago, it underlined corporate excess after stock markets were clobbered and banks wobbled in the wake of the Lehman Brothers collapse.
Fast forward to 2018, and China is trying to learn the lessons that sparked the Great Recession in the West by tightening “supervision” of “too big to fail” institutions, which would safeguard the US$40 trillion financial system.
Spearheaded by the People’s Bank of China, regulators will now conduct risk assessment and stress tests on “systemically important financial institutions or SIFIs.”
The decision comes at a time when President Xi Jinping’s administration is waging a war against debt in the local government sector and across an array of industries by overhauling lending practices.
“Following the Global Financial Crisis, standard-setting bodies such as the Basel Committee for Banking Supervision and Financial Stability Board (FSB) have issued assessment reports on major global banks and insurance institutions to tackle exposed risks,” the PBOC, the de facto central bank, said in a statement earlier this week, after revealing its new “stress test” plans.
The world’s second-largest economy already has its ‘top five’ on the FSB list of “global systemically important banks and insurers.”
Major lenders such as the Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China are included along with Ping An Insurance.
But a new wave of online financial service companies will be added to the PBOC “watch list,” according to mainland media reports.
They will probably include fintech giants Ant Financial and Alipay, which are associated with the sprawling e-commerce behemoth Alibaba, as well as Tenpay, a subsidiary of internet titan Tencent.
“At least 30 banks, 10 securities firms and 10 insurance companies, which account for at least 75% of total assets in their respective sectors [will be included],” the PBOC stated.
But it is the fintech industry that has the PBOC and the China Banking and Insurance Regulatory Commission, along with the China Securities Regulatory Commission, burning the midnight oil.
As Beijing battles to rein in financial excess, the central bank has to make sure there is enough liquidity in the pipeline for businesses to withstand economic threats such as the trade war with the United States.
“China’s regulators are indeed trying hard to avoid financial risk as credit levels remain very high,” Liao Chenkai, an analyst at Capital Securities Corp in Shanghai, told Bloomberg. “Including more companies as systemically important will push them to strengthen their capital position.”
Key players in the fintech arena, such as Ant which runs Alipay, have expanded rapidly. Mobile payment platform Alipay, for example, has 870 million active users with 600 million in China and 270 million in the rest of the world.
Moreover, Ant is the king of the unicorns, or startups worth more than $1 billion, after being valued at $150 billion. In the summer, it raised an incredible $14 billion in a single round of investment, dwarfing the $4.5 billion funding it tapped into two years ago.
But in a bid to diversify, the firm is planning to move away from Alipay’s beat by specializing in technology services for financial institutions such as the big banks.
“Ant Financial, from day one, [was] positioned as a tech company,” CEO Eric Jing said earlier this month. “But previously we just wanted to make sure we are really using the tech to be innovative, to create examples, to redefine financial services that people can feel, can touch.”
Redefining China’s online financial sector appears to be exactly what the regulators have in mind.