People’s Bank of China Advisor Says China Should Start Planning for Bailout Now

(Bloomberg) — People’s Bank of China adviser Ma Jun has probed the economy for triggers of financial turbulence, and proposed measures including direct bailouts of enterprises and bank re-capitalization should a crisis hit.

Property bubbles, local government contingent debt, the heavy reliance on land sales for financing or the shadow banking sector could set off a major crisis in China, according to Ma’s articlepublished on the Wechat account of PBOC-affiliated magazine China Finance.

He said actions should be taken in advance to prevent risks from materializing, including:

  • “Full attention” to smaller banks, such as joint-stock, city and rural lenders, as their role in generating systemic risks may “very likely exceed expectations”
  • Revision to the central bank law to enhance the PBOC’s ability to make decisions more independently and giving forward guidance
  • Allowing more types of financial institutions other than commercial banks to be able to participate in bond trading to improve the liquidity of the market

Invention ranging from direct bailout of enterprises, capital injections of small banks and revision of rules on market trading could be used, according to the article. Regulators could also benefit from better preparation such as making a list in advance of institutions that may be hit and a workflow of intervention, it said.