| | | Effective PR

Sold as a "takeover," the regulatory action against Baoshing Bank is much more than that.

BIScom Subsection: 
Editorial Staff

In the North West of China, in the district of Inner Mongolia, a small private bank started to get into trouble. The warning signs, with hindsight, were apparent but it's a kind of problem that, while common in Russia a couple of decades ago, is not usual in China. The results, however, are predictable for both financial and cultural reasons.

In the recent Korean TV drama series "The Banker," one of the country's largest banks ran into trouble because, amongst other things, it was too close to corrupt industrialists. The story was, in some ways, reminiscent of the old description of Hong Kong: that it was run by the Hong Kong Bank, the Jockey Club and the Governor in that order. In the Korean drama, a cabal of four, the boss of the bank, the head of the FSS, the financial regulator, a politician/industrialist and an academic who was central in defining policy, effectively defined the financial sector. In the 1990s, as the USSR fell apart, there were far too many banks to regulate. Many were owned by criminals, a state of affairs documented in the book "Understanding Russian Banking: Russian Banking System, Securities Markets, and Money Settlements" by Lapidus, et al.

While there is no doubt that, as China's economy undergoes huge change, there will be at least some dodgy connections, China is in a different position to both Korea and Russia: in Korea, the FSS came along after a financial crisis was made worse by the collapse of the chaebol system in which huge conglomerates were often under the control of a small number of members of a single family. The chaebols were massively diversified and financial businesses were an essential part of the structure to facilitate intra-group trading and support, sometimes in ways that external banks would not have authorised or, even, been permitted to authorise. In Russia, there was no centralised regulator when the USSR broke down for the simple reason that everything was regulated from the centre including the banks. Independent banks were, to all intents and purposes, unknown.

That is not the position in China. The People's Bank of China and the regulatory commissions for securities and insurance have been in place for years; the slow relaxation of the financial sector took hold in the mid 1990s. There is, therefore, a complete and highly effective regulatory regime that has managed the Chinese financial sector in a way that has has allowed, albeit within defined ways, a significant relaxation of the sector. Given the enormous numbers of people and companies, the number of serious regulatory problems is extraordinarily small.