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

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New Digital Editor: Serena Kutchinsky

The New Statesman appoints Serena Kutchinsky as Digital Editor.

Serena Kutchinsky is to join the New Statesman as digital editor in September. She will lead the expansion of the New Statesman across a variety of digital platforms.

Serena has over a decade of experience working in digital media and is currently the digital editor of Newsweek Europe. Since she joined the title, traffic to the website has increased by almost 250 per cent. Previously, Serena was the digital editor of Prospect magazine and also the assistant digital editor of the Sunday Times - part of the team which launched the Sunday Times website and tablet editions.

Jason Cowley, New Statesman editor, said: “Serena joins us at a great time for the New Statesman, and, building on the excellent work of recent years, she has just the skills and experience we need to help lead the next stage of our expansion as a print-digital hybrid.”

Serena Kutchinsky said: “I am delighted to be joining the New Statesman team and to have the opportunity to drive forward its digital strategy. The website is already established as the home of free-thinking journalism online in the UK and I look forward to leading our expansion and growing the global readership of this historic title.

In June, the New Statesman website recorded record traffic figures when more than four million unique users read more than 27 million pages. The circulation of the weekly magazine is growing steadily and now stands at 33,400, the highest it has been since the early 1980s.