Economists downplay fears of financial crisis(2)

Over-analyzed or not?

"We think that the liquidity crisis will spill over to the broader financial sector and the real economy," Chang Jian, China economist with Barclays Capital, wrote in a research note sent to the Global Times Thursday.

"We see increased downside risks to our below-consensus economic growth forecasts for the second half," she wrote, stressing however "the probability of a meltdown of the financial system remains small."

Barclays' latest downward revision of its China growth forecast came earlier this month after the announcement of dismal export growth in May. The investment bank lowered its 2013 China growth projection to 7.4 percent from 7.9 percent.

Barclays expects financial costs to rise and for the available credit for riskier borrowers to be curtailed.

The ripple effects will be felt especially by small- and medium-sized enterprises (SMEs), which helped revitalize the economy but have long been feeling the pinch of credit shortage, Zhou Dewen, vice president of the China Association of Small and Medium Enterprises, told the Global Times Wednesday.

Lu Ting, China economist with Bank of America Merrill Lynch in Hong Kong, even expressed his harsh rhetoric in a note sent to the Global Times on Tuesday, stating "the brinkmanship displayed in dealing with these issues could be risky to China's economic stability as policymakers may not have full control of the unfolding volatilities set off by the liquidity squeeze even though the squeeze is supposed to be temporary."

But some economists believe that playing up the unintended aftermath is simply over-analyzed.

"I don't see any severe consequences," Li Wei, China economist at Standard Chartered Bank in Shanghai, told the Global Times Wednesday.

The latest wave of liquidity squeeze would have little long-term impact, Li said, downplaying fears of any catastrophe in the wake of the central bank's tough approach.

Results released Wednesday from a survey of 31 renowned experts in the financial sector that include Peng Wensheng, chief economist of China International Capital Corp, may help inject more confidence into market sentiment.

The survey conducted by Chongyang Institute for Financial Studies said that 27 of the 31 respondents saw no financial crisis in China, where it would be unlikely to see a repeat of the Lehman Brothers collapse.

Sidebar: Low prices for bankers

The interbank market is a critical component of financial capitalism, which is characterized by a predominance of the pursuit of profit from the purchase and sale of, or investment in, currencies and financial products.

Traditionally, deposit banks attract savings and lend out money to enterprises for production. With the rise of financial capitalism since the late 20th century, investment banks obtain funds on the interbank market to re-lend for investment purposes, while at the same time, investment firms act on behalf of other concerns, by selling their equities or securities to investors, for investment purposes.

This kind of casino economy has led to a preference for speculation in the financial market, which provides interest income to non-laborers, over investment for entrepreneurial growth and real production.

The interbank market is where large commercial banks buy and sell currencies among themselves on the spot, or for the short-term, for a profit, so it is also known as the spot currency market. The transactions are carried out electronically to maximize efficiency and lower the cost.

In China, such an electronic platform is based in Shanghai, namely the National Interbank Funding Center. The center is authorized to calculate and publish the prices of eight different kinds of currency trading at 11:30 am each business day.

In China, the banks have also been cooperating with trusts, another form of financial intermediary, to offer the investors wealth management products (WMPs), which are less regulated than the deposit products and carry higher risks but also higher potential profits. Because WMPs are not included in the banks' regular balance sheets, they are also known as an off-balance sheet business, or shadow banking.

When WMPs mature, the banks need to pay the investors with principals and interests, and if a bank cannot pay, then it needs to borrow. The cheapest and quickest way to source such funding is, of course, to borrow from the interbank market.

However, a interbanking crisis can happen when there is no bank willing to lend in the interbank market and the money product prices soar too high, either because, simply put, there is a run on the bank by depositors, or because an excessive amount of financial products, such as WMPs, mature at the same time.