The Chinese banking accident waiting to happen

An IMF report suggests Beijing is storing up huge problems in its disordely and opaque financial sys

A number of newspapers yesterday reported a warning by the International Monetary Fund about the health of China's banking sector. I'm surprised it hasn't been more widely discussed in the context of the generally dismal outlook for the global economy.

The IMF's analysis has some quite frightening implications. The general message is that the Chinese financial sector is full of hidden liabilities and is vulnerable to shocks from the bursting of a property bubble. It is written, as IMF reports always are, in arid technical prose, but the picture that emerges is one of a system that has become bloated and irresponsible thanks to a lack of regulatory and commercial rigour. Anyone know any other financial systems that meet that description?

The system is becoming more complex and inter-linkages between markets, institutions, and across international borders are growing. In addition, informal credit markets, conglomerate structures, and off-balance sheet activities are on the rise.

The scale of the risk was hard to assess because of a shortage of good data, which hardly encourages a generous interpretation of the situation.

Perhaps most alarming is the suggestion that Chinese banks have made heaps of loans based on political rather than commercial imperatives.

Banks' large exposures to state-owned enterprises, guaranteed margins provided by interest rate regulations, still limited ability and willingness to differentiate loan rates, coupled with the implicit guidance on the pace and direction of new lending, undermine development of effective credit risk management in the banks. It is important that banks have the tools and incentives to make lending decisions based upon purely commercial goals.

Given China's well-documented problems with corruption, that would imply that Chinese bankers have been doling out cash to their patrons and friends in state-owned companies. That situation can run along unchecked for a while, but at some point in its transition to a functional market economy Beijing will have to enforce some discipline in terms of which enterprises are bona fide and which are unprofitable make-work schemes - or worse, empty shells funneling cash to corrupt officials - supported by loose credit. It sounds as if any serious rigour along those lines would risk bank failures and even a systemic financial crisis. That can't be good.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

Grant Shapps on the campaign trail. Photo: Getty
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Grant Shapps resigns over Tory youth wing bullying scandal

The minister, formerly party chairman, has resigned over allegations of bullying and blackmail made against a Tory activist. 

Grant Shapps, who was a key figure in the Tory general election campaign, has resigned following allegations about a bullying scandal among Conservative activists.

Shapps was formerly party chairman, but was demoted to international development minister after May. His formal statement is expected shortly.

The resignation follows lurid claims about bullying and blackmail among Tory activists. One, Mark Clarke, has been accused of putting pressure on a fellow activist who complained about his behaviour to withdraw the allegation. The complainant, Elliot Johnson, later killed himself.

The junior Treasury minister Robert Halfon also revealed that he had an affair with a young activist after being warned that Clarke planned to blackmail him over the relationship. Former Tory chair Sayeedi Warsi says that she was targeted by Clarke on Twitter, where he tried to portray her as an anti-semite. 

Shapps appointed Mark Clarke to run RoadTrip 2015, where young Tory activists toured key marginals on a bus before the general election. 

Today, the Guardian published an emotional interview with the parents of 21-year-old Elliot Johnson, the activist who killed himself, in which they called for Shapps to consider his position. Ray Johnson also spoke to BBC's Newsnight:


The Johnson family claimed that Shapps and co-chair Andrew Feldman had failed to act on complaints made against Clarke. Feldman says he did not hear of the bullying claims until August. 

Asked about the case at a conference in Malta, David Cameron pointedly refused to offer Shapps his full backing, saying a statement would be released. “I think it is important that on the tragic case that took place that the coroner’s inquiry is allowed to proceed properly," he added. “I feel deeply for his parents, It is an appalling loss to suffer and that is why it is so important there is a proper coroner’s inquiry. In terms of what the Conservative party should do, there should be and there is a proper inquiry that asks all the questions as people come forward. That will take place. It is a tragic loss of a talented young life and it is not something any parent should go through and I feel for them deeply.” 

Mark Clarke denies any wrongdoing.

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.