China’s $9 T Moral Hazard is Now Too Big to Ignore
Loevinger, a former China specialist at the US Treasury who’s now an analyst TCW Group Inc. in Los Angeles, which oversees about $191 billion, said by e-mail. “But seeing is believing. Saying investors won’t get bailed out is important, but you have to show them you mean it.”
For President Xi Jinping’s government, it’s a particularly sensitive time to be shaking up an industry that manages assets worth more than three-quarters of China’s gross domestic product. Policy makers have been placing an emphasis on financial stability as the ruling Communist Party prepares for a twice-a-decade leadership reshuffle later this year. They also need to grapple with a host of other risks, from a potential trade war with America to political upheavals in Europe and North Korea’s nuclear program. History suggests Beijing may have a hard time following through on reforms. One of the biggest tests of the implicit guarantee on trusts — sold to wealthy individuals — came in 2014 when a product called Credit Equals Gold No. 1 lacked the funds to repay investors. The trust, which was sold to clients of state-run Industrial & Commercial Bank of China, was eventually bailed out by unidentified buyers after the episode roiled markets around the world.