SVB collapse sounds alarm in China over financial risk amid push for tech innovation
South China Morning Post
4 min read
The sudden collapse of Silicon Valley Bank has sounded an alarm in China, prompting policymakers to stress the fine balance that must be maintained between de-risking and state funding for technological innovation.
China's preoccupation with the issues has already led to a regulatory shake-up at the recently concluded "two sessions", with a new national financial oversight administration proposed and the Ministry of Science and Technology given bigger responsibilities in handling US technological decoupling and containment.
Few Chinese analysts expect an immediate threat to the country's financial system from the collapse, but many say the failure of the technology-focused American bank provides a valuable lesson that oversight must be improved, especially when huge sums are being poured into tech innovation in the name of a new whole-nation mechanism.
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"It won't generate a substantial impact on China's financial markets. However, the domestic financial industry needs to learn the lesson and always put risk control as the No 1 priority," said an editorial in the Securities Times, a newspaper under the Communist Party mouthpiece, the People's Daily.
Liu Xiaochun, deputy director of the Shanghai Finance Institute and a former president of the Hangzhou-based Zheshang Bank, said it was inappropriate to set up a similar specialist bank in China.
Instead, large commercial banks should establish special branches to finance tech start-ups and innovation, but manage their overall risk exposure at headquarters.
"We must design a business model that can cover the potential loss in supporting scientific and technological innovation enterprises," he wrote in an article published on Tuesday by China Finance 40.
Financial regulators are focused on defusing deep-seated financial risk, which has been elevated in Beijing's priorities as the coronavirus pandemic and the property market crisis have slowed the economy.
On Wednesday, the People's Bank of China pledged to improve financial security and contingency plans, while also safeguarding the operations of financial markets and financial infrastructure.
The central bank also for the first time vowed to respond to US and Western containment, following a meeting to study President Xi Jinping's speeches during the "two sessions".
The State Administration of Foreign Exchange said on Wednesday it would strengthen macroprudential assessment of the foreign exchange market to prevent the impact of overseas shocks, without elaborating.
The China Banking and Insurance Regulatory Commission vowed on Monday to improve the governance of financial institutions, particularly small- and medium-sized banks vulnerable to liquidity and other risks.
"We must insist on the bottom line thinking to dispose of a variety of risks timely," said the banking regulator, which will soon be absorbed into a more powerful national financial regulatory administration.
Xi has warned about potential risks in funding technological innovation.
"We must be cautious in the implementation," he was quoted as saying by the official Xinhua News Agency in his "two sessions" speeches over the weekend. "We must study thoroughly and make full preparations. Pilots may be needed if necessary."
One of Beijing's answers to US technological containment is a whole-nation mechanism, where the government mobilises and coordinates resources, which differs from the US where Silicon Valley start-ups are funded through venture capital or share sales.
Despite higher government spending, most Chinese innovation funds are provided by commercial banks.
The Chinese central bank released a 200 billion yuan (US$29 billion) worth relending quota for technological innovation last year. Its relending rate was set as low as 1.75 per cent, which was used to incentivise commercial bank loans for hi-tech firms.
Zhou Hao, a finance professor at Tsinghua University, compared the Silicon Valley Bank crisis to China's restructuring of Baoshang Bank or Hengfeng Bank several years ago, saying it justified the current financial regulatory reshuffle.
"Only a comprehensive and well-functioning regulatory regime can handle such a risky event effectively and timely," he said on China Finance 40.
The world's second largest economy has a de-risking system coordinated by the vice-premier led Financial Stability and Development Commission. A new financial stability law is in the final stage for review and approval.
However, Zhao said the Chinese government needs to keep improving procedures for monitoring, identifying and handling systemic risk.
