Cover story, issue no 389 October 13 2008
Translated by Ren Yujie
Original article: [Chinese]

Chinese financial regulators have put a financial crisis early warning network to the test for the first time since its inception three years ago, a source close to China's top financial watchdog agencies told the EO.

On October 4, after the US Congress overwhelmingly passing the USD 700 billion bank rescue plan, a spokesperson for China's central bank announced that a scheme had already been drafted to reduce the influence of the US financial crisis on China.

The crisis would be the first test for the National Financial Crisis Rapid-Response Scheme, which was jointly drafted by several of China's top market watchdog agencies in 2005.

After that document was drafted, the People's Bank of China, China's central policy bank, released the Trial Emergency Scheme for Financial Institutions, which among other things clarified the central bank's role in a financial crisis, delineated internal duties there, and set systemic relationships among financial institutions during a financial crisis.

A source close to top Chinese financial watchdog agencies told the EO that information from the China Banking Regulatory Commission (CBRC), the China Security Regulatory Commission (CSRC) and the China Insurance Regulatory Commission (CIRC) was being compiled by the central bank and submitted to the State Council on a daily basis.

The source said that as the risk of a global economic recession had risen, China's central bank and the three watchdog agencies had began to closely monitor breaking points in China's financial system, even though domestic financial institutions had suffered relatively little from the US financial crisis thus far.

He said: "From a global perspective, risk at financial institutions is classified into three levels. The first is when risks emerge at financial institutions and managers suggest precaution; the second is when an institution experiences a cash shortage and require regulators to inject liquidity; and the third is when a large-scale bankruptcy erupts, requiring supervisors to provide protection measures like depositors' insurance."

The details of China's central-government-level crisis prevention scheme had yet been officially published.But in many provincial-level financial crisis early-warning schemes acquired by the EO, if financial crises abroad "had affected or would possibly affect the domestic macroeconomic stability" it would be ranked as an "class one" event, or a "critically important financial emergency". This was the most severe classification and would require a "class one" response.

A source from the CBRC said that the agency's main job lately was to closely monitor commercial banks' capital adequacy ratio, provisioning coverage ratio and non-performing loan ratio. Recently, the CBRC had required commercial banks to report their exposure to US dollar investment bonds and had carried out stress tests on their loans.

Market observers have worried about foreign banks in China. However, reports put the non-performing loan ratio of foreign banks in China was 0.52%, the provisioning coverage ratio was 207.47% and the capital adequacy ratio was 16.9%.

Meanwhile, the fund utilization department under the Chinese Insurance Regulatory Commission was carrying out systematic research on the effects of the US financial crisis, and establishing policy countermeasures.

An insurance industry source told the EO that the crisis had little effect on China's insurance industry because insurance funds were forbidden to invest in overseas financial derivatives. Only a few insurance companies, such as Pingan Insurance, suffered large losses due to overseas investments. He added that overseas investment banks had recommended structured financing products to domestic insurance companies, but the latter were not tempted because they were unfamiliar with such investments.

The State Administration of Foreign Exchange (SAFE) had yet to publish any countermeasures. A source closed to SAFE said that they were riding out the crisis by holding firm to current policy despite the rapidly changing environment. "The top priorities for SAFE are exchange rate stability and risk prevention," the source close to market regulators told the EO. "In fact, not dumping US bonds is an active move," he added.