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Friday, March 31, 2023

China observes US banking crisis

The banking crisis in the United States is being closely watched in China, where Silicon Valley Bank remains embedded in a dynamic but cautious innovation economy.

The Chinese internet exploded with chatter of wider overflow over the weekend after the SVB collapse, the largest for a financial institution since 2008.

The owners of SVB Finance Group have been operating in China since the late 1990s, with offices in major coastal cities such as Shenzhen and Hong Kong. Its main business is a 2012 venture with Shanghai Pudong Development Bank, a 50:50 joint venture known as SPD Silicon Valley Bank, or SSVB.

Like its now-bankrupt California cousin, SSVB is targeting China’s tech startups and venture capitalists by giving them easier access to dollar funding. The bank, hailed as the first of its kind in the country, is safe for now. However, confidence in its risk-accepting business model could be less in the future.

“SPD Silicon Valley Bank has a standardized corporate governance structure and an independent balance sheet,” it said in a statement Sunday. “As China’s first technology bank, SPD Silicon Valley Bank is committed to supporting Chinese science and technology enterprises and has always maintained sound operations in accordance with Chinese laws and regulations.”

Over the past week, some Chinese companies have tried to reassure investors that their exposure to SVB is limited. No one has publicly acknowledged any losses from the Silicon Valley lender’s dramatic 48-hour collapse last week.

But the future of the SSVB is still in the stars. A report on Monday from Hong Kong South China tomorrow post said the Shanghai banking authorities are discussing a number of options. High on their list is a buyout by the bank’s state partner, which could lead to a more conservative approach to lending.

“Many people on both the US and Chinese sides are lecturing about the global financial contagion or that Chinese startups will suffer and cannot get funding in dollars. I think it’s too early to say,” said Emily Jin, a research fellow at the Center for a New American Security news week.

“But would the event be a nudge for more enterprising banks, driven by market considerations, to spring up within China?” I’d say no, largely because China’s financial sector machinery is designed for state-owned companies and not necessarily many of these private actors. That’s probably one of the reasons the Chinese startups went to SVB,” Jin said.

China, which hopes to meet its modest GDP growth target of “around 5 percent” this year after missing in 2022, has once again opted for “stability” as its buzzword.

The People’s Bank of China, the central bank, has pledged to ensure the stability of the country’s $60 trillion financial sector by, among other things, increasing the deposit insurance function and addressing issues related to “high-risk institutions.”

“China’s financial operations are generally solid and the risks are manageable,” it said on Wednesday after a working conference on financial stability was held.

“Significant progress has been made in the reform and risk control of a small number of troubled small and medium-sized financial institutions,” the bank said. “Illegal financial activities have been effectively corrected and financial markets are functioning smoothly.

The state-owned securities times The financial daily said in an editorial earlier Wednesday that SVB’s collapse would have minimal impact on China’s financial sector, but noted important lessons for Chinese players in the industry.

According to the paper, SVB’s fate reflected the “looseness” of US regularity requirements for lender liquidity. “In contrast, in recent years China has updated its regulatory policies and reformed its regulatory institutions around the logic of ‘financial stability’.”

Targeted actions by the Chinese government have “reversed the industry chaos, basically curbed shadow banking and eliminated potential financial risks, making China’s various wealth management products healthy and standardized,” it said.

“I tend to agree that the impact on China’s financial sector will be fairly modest. China may have deployed some firewalls to mitigate the risk of spillover. If anything, it should be manageable,” Guonan Ma, a senior fellow at the Asia Society Policy Institute, said of the SVB fallout.

“On the other hand, if there is an expansion of the opening up of the financial system, if you have a medium-sized crisis like Silicon Valley Bank, there will inevitably be contagion,” he said news week.

China weathered the 2007-2008 financial crisis by launching the world’s largest stimulus package – some $580 billion. In political circles, China’s post-crisis economic recovery is still being described as a confidence-boosting turning point for those in the Communist Party concerned with domestic governance.

“In the years leading up to 2008, Beijing was busy copying the US approach and certainly seemed at a loss,” Ma said. “They realized they couldn’t just copy what the US or the West were doing. They also needed to tighten regulations to some extent, so they looked for other places that were less affected by the global financial crisis at the time.

“In my view, domestic financial risks are still higher and rising, partly not because of the regulations but because some of those risks are related to the government itself, for example local government debt. So they want the financial regulator to be stronger, more consolidated and more powerful,” he said of Beijing’s newly created national financial regulator.

The Chinese state media’s eagerness to contain the risks associated with SVB may be an attempt to calm the market, CNAS’s Jin said.

“If Chinese officials don’t come out and say it publicly, they’re absolutely milking this situation privately,” she said. “The CCP would likely use this as an opportunity to centralize its authority. Whether the centralization of their authority will actually lead to prudent financial regulation is a question.”

Do you have a tip on a world news story that news week should cover? Do you have a question about China? Let us know at worldnews@latestpagenews.com.

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