Has China’s Joseph Schumpeter moment arrived? China has suggested its decision to roll out deposit insurance for bank accounts beginning on May 1 will usher in a wave of creative destruction, chastening the cronyism that plagues the country. And there is some logic to the official spin. There’s a flip side, after all, to Beijing’s declaration that normal consumers will be kept safe in a period of market turmoil — namely, the banks themselves could be permitted to go bust.
If there were reason to believe that would really happen, it would be an important step toward straightening out China’s financial system, and to achieving the country’s longer-term goal of making the yuan a global reserve currency. Unfortunately, China’s system of moral hazard won’t be worth much until it passes far more ambitious financial reforms. Here are three reasons why.
First, China’s banking system is still very closely tied to the state. China has a long history of organizing bailouts for state-owned companies, including one of Asia’s biggest-ever bank bailouts in 1998. “As long as banks are state owned and senior officers are appointed by the organization department of the Communist Party,” says Shanghai-based Andy Xie, former Asia-Pacific chief economist at Morgan Stanley, “reforms will always be superficial.”
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