China Watches U.S. Banking Crisis

The banking crisis in the United States is being watched closely in China, where Silicon Valley Bank remains plugged into a vibrant but cautious innovation economy.

The Chinese internet exploded with chatter over the weekend following SVB's collapse, the biggest for a financial institution since 2008. In the days after the U.S. federal government stepped in to save the bank's depositors, Beijing's banking authorities have also come out to assuage concerns about a wider spillover.

SVB's financial group owners have done business in China since the late 1990s, with offices in major coastal cities like Shenzhen and Hong Kong. Their main business is a 2012 undertaking with the Shanghai Pudong Development Bank, a 50-50 joint venture known as SPD Silicon Valley Bank, or SSVB.

Like its now-bankrupt California cousin, SSVB caters to China's tech startups and venture capitalists by giving them easier access to dollar funding. The bank hailed as the first of its kind in the country is safe for now. However, there may be less confidence in its risk-accepting business model going forward.

"SPD Silicon Valley Bank has a standardized corporate governance structure and an independent balance sheet," it said in a statement on Sunday. "As China's first technology bank, SPD Silicon Valley Bank is committed to serving Chinese science and technology enterprises, and has always had sound operations in accordance with Chinese laws and regulations."

In the past week, a number of Chinese firms have sought to assure investors that their exposure to SVB was limited. None has publicly acknowledged any losses from the Silicon Valley lender's dramatic collapse over 48 hours last week.

But the future of SSVB remains up in the air. A report on Monday by Hong Kong's South China Morning Post said Shanghai banking authorities were discussing a range of options. Top of their list is a buyout by the bank's state-owned partner, which could lead to a more conservative approach to lending.

"A lot of people on both the U.S. and the Chinese side are pontificating about global financial contagion, or that Chinese startups are going to suffer and won't be able to get dollar funding. I think it's too early to say," Emily Jin, a research assistant at the Center for a New American Security, told Newsweek.

"But would the event be an impetus for more entrepreneurial banks driven by market considerations to spring up inside of China? I would say no, mostly because the Chinese financial sector machinery is for state-owned enterprises and not necessarily built for purpose for these private actors. That's probably among the reasons why certain Chinese startups went to SVB," she said.

China, which hopes to meet its modest "around 5 percent" GDP growth target this year after falling short in 2022, has once again opted for "stability" as a watchword.

The People's Bank of China, the central bank, has pledged to ensure the stability of the country's $60 trillion financial sector by, among other things, elevating the function of deposit insurance and addressing problems associated with "high-risk institutions."

"China's financial operation as a whole is sound and the risks are manageable," it said on Wednesday after holding a work conference on financial stability.

"Significant progress has been made on the reform and risk control of a small number of problematic small- and medium-sized financial institutions," the bank said. "Illegal financial activities have been effectively rectified, and the financial markets are operating smoothly.

The state-owned Securities Times financial newspaper said in an editorial earlier Wednesday that SVB's collapse would have a minimal impact on China's finance sector, but noted meaningful lessons for Chinese players in the industry.

According to the paper, SVB's fate was a reflection of the "looseness" of U.S. regularity requirements on lender liquidity. "In contrast, in recent years, China has updated its regulatory policies and reformed its regulatory institutions around the logic of 'financial system stability.'"

Targeted moves by the Chinese government had "reversed industry chaos, basically curbed shadow banking and resolved potential financial risks, making China's various asset management products healthy and standardized," it said.

"I tend to agree that the impact on China's financial sector will be fairly modest. China may have provided some firewalls to mitigate the spillover risk. If anything, it should be manageable," Guonan Ma, a senior fellow at the Asia Society Policy Institute, said of the SVB fallout.

"On the other hand, if there's a broadening of the opening up of the financial system, contagion will be taking place inevitably when you have a midsized crisis like the Silicon Valley Bank," he told Newsweek.

China weathered the financial crisis of 2007-2008 by introducing what was the world's largest stimulus package—some $580 billion. In policymaking circles, the Chinese economy's emergence after the crisis is still described as a confidence-injecting watershed moment for those in the Communist Party concerned with domestic governance.

"In the years before 2008, Beijing was busy copying the U.S. approach and certainly seemed to be at a loss," Ma said. "They realized they couldn't simply copy whatever the U.S. or the West was doing. They had to tighten regulations to some extent as well, so they looked to other places which were affected less by the global financial crisis at the time.

"In my view, the domestic financial risks are still higher and have been rising, in part not because of the regulations, but because some of these risks are related to the government itself, for example, local government debt. That's why they want to have a stronger, more consolidated, more powerful financial regulator," he said of Beijing's newly created National Financial Regulatory Administration.

Chinese state media's eagerness to tamp down risks associated with SVB may be an attempt to pacify the market, said Jin of CNAS.

"Whether Chinese officials make a public statement, they likely intend to milk this situation," she said. "The CCP would likely use this as an opportunity to further centralize its financial regulatory authority. Whether centralizing its authority actually leads to prudent financial regulation and meaningful reform is a question."

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