Expected: a massive bailout of banks – Victor Shih

A massive bailout of China’s major banks might be one of the options to let them recoup much of the 2.4 trillion Renminbi (255 billion euro) spend during the recent financial rescue operation, says professor Victor Shih to BusinessWeek today.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities.

Chinese officials pledged this week to limit the risks posed by the investment vehicles, which circumvent restrictions on local-government borrowing to channel money into stimulus projects. Yan Qingmin, head of the banking regulator’s Shanghai branch, said March 5 that China plans to nullify guarantees provided by local governments for some loans.

It would not be the first time, China’s ministry of finance would jump in to clean up the books of its commercial banks. The five larger banks emerged from the planned economy with many bad loans and a tradition of lending out money without much hope of ever getting it back. That operation has been rather successful, but has suffered a strong setback during the most recent years.
Shih is rather pessimistic when it comes to fast solutions:

He said that if the central government stops lending to the entities now, the cost of a bailout may already be “in the neighborhood” of 3 trillion yuan.

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Victor Shih is a speaker at the China Speakers Bureau. When you need him at your conference, do get in touch.