Making Sense of the Wall Street Crisis

Caijing approached the dramatic financial meltdown on Wall Street from two perspectives -- microeconomic and macroeconomic -- to help readers make sense of the complex developments. A timeline of the crisis, which was still unfolding as this edition of Caijing went to press, traced the events from the collapse of Bear Stearns through the takeover of Merrill Lynch by Bank of America and the bailout of AIG.

The macroeconomic fallout from the credit-related meltdown is certain to affect China and the rest of the world in terms of interest rates, bond markets and investment strategies for a long time. Fortunately, Chinese banks have reported limited exposure to the toppled Wall Street giants. But lessons learned from U.S. failures may influence China’s regulatory environment and the future of financial product innovation.

Contaminated Milk Crisis Expands in China

China’s tainted milk crisis has unexpectedly mushroomed. As of September 21, officials said four babies had died and more than 10,000 had been hospitalized after drinking powdered milk formula tainted with melamine, an industrial chemical that can cause kidney disease. Milk products sold by 22 Chinese companies, including famous brands, were found to be contaminated. The crisis has rocked the domestic dairy industry, striking a fresh blow to global confidence in Chinese food products.

Although China’s central government reacted quickly and punished several officials linked to the incident, consumers and scholars criticized the nation’s food security supervision system as inefficient and slow. Many say it’s time for the government to plug holes in the food safety network. Meanwhile, regional governments are scrambling to help hard-hit dairy firms and farmers.

Moderate Financial Supervision Urged for China

Financial innovation should be encouraged and regulatory input kept at reasonable levels despite the current criticism of weak supervision tied to America’s financial turmoil, government policy maker Wu Xiaoling has written for Caijing.

Wu, a former central bank deputy governor now serving as deputy director of the Financial and Economic Committee of the National People’s Congress, said China should liberate its financial sector while tightening monetary policy. She said diverse organizations, not just commercial banks, should be encouraged to play the market. She favors respect for individual property rights, lifting credit restrictions for citizens, and reasonable regulatory supervision that permits government interference only when public interests are at stake, thus lowering administrative costs. In general, Wu wrote, individuals should make their own financial decisions and accept relevant risks.

Liaoning Bank’s NPLs Jump as Big Firm Defaults

In Huludao, a Liaoning Province city three hours from Beijing, a local branch of state-owned Agricultural Bank of China is saddled with non-performing loans tied to a local construction company. The company, Zhida Group, started from scratch 14 years ago and has reported 1.1 billion in assets. But last spring, Zhida stopped repaying loans, and its 850 million yuan default sent the bank branch’s NPL rate soaring 20 percent, forcing the bank to cut 15 jobs.

A branch insider blamed all-too-cozy relations between branch and company officials for the default. “The bank and company joined hands to dodge debt,” while key officials hid the truth about alleged bribes paid to bankers by Zhida, the source said. The bank, however, has issued an official statement denying the allegations.

Annual Iron Ore Price Talks at a Crossroads

Pressure is mounting for China’s steel companies as steel prices decline after eight years of rapid increases. More challenges loom this autumn as the steelmakers prepare for annual benchmark price talks with iron ore suppliers. Bargaining is set to start in November.