Caixin OnlineOpinionMagazine Columnist谢国忠 Andy Xie China's Version of 'Too Big to Fail'
07.16.2012 11:14

China's Version of 'Too Big to Fail'

Western-style finance has lost credibility in recent years, but some aspects of this country's financial system are cause for concern
By Andy Xie
 
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 A bank facade in Qingdao


Europe recently had something to cheer about with the apparent discovery of the Higgs boson particle at CERN, the European Organization for Nuclear Research. It is the biggest scientific discovery in decades. In the strange world of quantum physics, the Higgs boson particle that Peter Higgs theorized in 1966 endows basic elements in the universe with mass. Without it, everything would zip around at the speed of light. You and I wouldn't be here without it. This is why it is called "the God particle."
 
With this discovery, the European model that emphasizes the government's role in society has its best side on display. The European governments poured US $10 billion into this effort. In contrast, the U.S. government pulled the plug on a similar project a decade ago on cost concerns. In the large scheme of things, US$ 10 billion isn't a lot of money for such a discovery, considering that the world spends US$ 1.5 trillion on military expenditures every year.
 
At the same time, the euro debt crisis reminds us that when governments try to do too much things can go really bad. European governments have gone too far in guaranteeing living standards. They not only engage in large-scale income redistribution, but also limit competition through work-hour regulations and erecting market entrance barriers. This model isn't competitive in the era of globalization. European governments have run up debts to support the model. As the financial market worries about getting paid, the model bursts. The debt crisis is basically the process during which European governments come to grips with this.
 
The ugly story was on display in London. The British Parliament held a hearing on the Libor rigging scandal. Libor is the average borrowing rate of the leading banks in London in the interbank market. It covers all the major globally traded currencies. Most corporate loans in the world are linked to Libor. Even mortgages in Hong Kong and many other places are priced off the Libor. It is not an exaggeration to say that Libor is the most important price in global finance. When it can be manipulated, is there anything in finance worth trusting?
 
Evaporating Credibility

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