18 October 2018

Rate reform in Shanghai FTZ will lay bare local debt problem

Legendary US investor Warren Buffet once said that “only when the tide goes out you do discover who has been swimming naked.” This well-known and oft-quoted maxim may come true in the newly-established Shanghai Pilot Free Trade Zone, as experts warn that the much-hyped rate liberalization in the zone could unleash forces that will expose the systemic weaknesses in China.

Ma Yu {馬宇}, a senior researcher at the Ministry of Commerce, urged investors to take extra caution as the FTZ prepares to push forward market-based reform on interest rates. He cited an unidentified central bank official as saying that there could be a large-scale migration of bank deposits if the rate liberalization is not carried out in a synchronous manner nationwide.

This worry is not unfounded given the popularity of electronic finance nowadays, Ma noted, adding that opening a banking account in the zone will presumably be as simple as lifting a finger. If Shanghai initiates the rate reform, it is just logical to assume that domestic bank deposits will flock into FTZ to seek higher return.

But the question is: what about the banking system outside FTZ? Ma warned that heavy migration of deposits could easily cause liquidity crunch in some economically weak areas, and more importantly, lay bare the well-concealed local government debt problem in the world’s second largest economy.

The National Audit Office is about to complete an investigation on the government debts nationwide. While the watchdog has refuted reports that total local debts across the country have hit 20 trillion yuan (US$3.27 trillion), many believe the figure is far more than the 10.7 trillion yuan recorded in 2010.

As an overwhelming majority of the local debts are clustered in the banking system due to the close links between local governments and state-owned lenders, rate liberalization in Shanghai FTZ is likely to pave way for the non-performing loans on local debts to come to light, putting at risk the nation’s financial stability.

– Contact the writer at [email protected]



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