A decade ago, when China was struggling to clean up its banking system, regulators pulled a rabbit out of a hat. They set up a series of “bad banks” – called Asset Management Companies (AMC) – and took Rmb 1.4tn ($125bn) of debt off the hands of the four State Banks in Beijing. It was a big success, leading to the listing of the “Big Four” banks in Hong Kong and a healthier financial system. Now, they’re trying to pull the same trick again – this time across the country.
Chinese economists are quick to point out that the country has plenty of money to pay off its debts and could easily avert a financial collapse. The government, they say, could function as lender of last resort. How does one confirm whether there are sufficient resources in China to provide adequate capital for a massive collapse in economic activity, including a popping of China’s property bubble?