China should accelerate private bank development: Central bank governor

SHANGHAI (REUTERS) - China needs to do more to develop private banks and make asset securitisation a standard practice as it tries to strengthen its financial system, central bank governor Zhou Xiaochuan wrote in an article on the official People's Daily website.

The report comes as Beijing moves to tap private capital to head off any need to bail out its banking system for a second time in as many decades, which many already see as inevitable.

Another bailout would be considered a major failure of reform efforts over the past 10 years and would also risk further encouraging risky and wasteful investment by local governments if their current debts were written off.

Mr Zhou argued China should accelerate efforts to open up the financial system so it was better able to cope with economic shocks, including by allowing more private-sector participation in the banking sector to create a level playing field between small and large financial institutions.

China should make asset securitisation a regular part of its markets, he said, as it could help banks deal with bad loans and act as an alternative fundraising channel to the shadow-banking sector, in particular high-yielding wealth management products.

Asset-backed securities (ABS) can offer attractive returns and greater clarity on risks, at least in theory.

ABS gained notoriety during the global financial crisis for the part they played in the US subprime mortgage collapse, but most Chinese ABS are more simply structured.

There are doubts that securitisation could scale up fast enough in China to challenge what Fitch Ratings says is a US$2 trillion (S$2.54 trillion) market for wealth management products. Only about US$5 billion in securitised products are currently outstanding.