More needs to be done on China's credit reform

The State Council decided to expand the pilot program of credit asset securitization on Aug 28. But more needs to be done for this expansion, says an article in the 21st Century Business Herald (excerpts below).

Chinese banks, whose liability liquidity is much higher than their capital liquidity, have not enough asset-liability management tools.

Restricted by the Basel Agreement III, Chinese banks are under considerable pressure to replenish capital funds. Because of restrictions on the set ratio of deposits and loans, the banks must control their incremental loans.

Chinese economic growth is declining. The cash-thirsty small private enterprises, agricultural industries, along with urbanization and infrastructure construction, need bank loans.

Securitizing credit assets is conducive to improving the banks' balance sheets and easing their capital pressures to stabilize growth and transform the national economic structure.

Yet, the problem is whether the banks will be forced to loan to local governments, instead of companies, when they have enough capital.

Credit asset securitization, if applied properly, can become a tool to manage risks, but can also create systematic risks for the whole financial system.

The US sub-prime mortgage crisis is just a case in point.