The People’s Bank of China (PBoC) said Tuesday that some high-risk financial products should be allowed to fail as part of reforms to foster a more competitive, efficient financial system, the Wall Street Journal reported.
Greater competition and innovation in the state-dominated banking sector will ultimately make the industry more responsive to consumer needs, the central bank was quoted as saying in an annual report on the nation’s financial stability.
Stress tests were carried out on 17 major banks indicated that the Chinese banking system’s ability to withstand shocks was “relatively strong,” the PBoC said. The tests, however, showed the need to pay attention to risks from the property sector, wealth management products and local government debt, it said, adding that the public needs to be alert to investment risk.
The central bank called for removing what has been seen as a cast-iron guarantee for so-called “wealth-management products”. The investment products are often sold through banks and offer higher returns than traditional deposits as investors’ money are loaned onward to property developers, steel mills and other companies, the report noted.
“To encourage the healthy development of the country’s wealth-management market… and strengthen market discipline, some defaults should be allowed to happen naturally,” the PBoC said.
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