[lbo-talk] FT: Opening up to foreign capital would be a mixed blessing for China

[Marv Gandall]

Thanks to state control of the banking system and capital and currency movements - a legacy of the 1949 Chinese Revolution - China has so far avoided deep financial crises of the kind which have shaken Western capitalist economies, but this might now change as it further opens its economy to foreign portfolio investment.

As Micheal Pettis notes in the Financial Times:

"On paper the Chinese banking system may seem extremely vulnerable to..a breakdown, but, in fact, as long as Chinese financial markets were largely closed, and the regulators all-powerful, a financial crisis was unlikely. 

“We saw how this works in the interventions this summer in Baoshang Bank, Bank of Jinzhou and Heng Feng Bank, for example, when larger, well-capitalised financial institutions were forced to absorb their losses and extend their liabilities. 

“But once China opens up its domestic financial markets to international capital flows, maintaining stability in this way will become far more difficult. 

"It is one thing for Beijing to protect Chinese investors by ordering a major Beijing bank to inject capital into Bank of Jinzhou and take over its operations. It is another thing altogether to control or protect foreign investors and financial institutions. What is worse, much of the foreign capital will be highly speculative and subject to investment fads.”

Full: https://www.ft.com/content/14fe748e-e104-11e9-b8e0-026e07cbe5b4