China should allow wealth-management and trust products defaults in an effort to improve the ability of the market to price risks, and reduce the incentive for financial firms to sell risky products, according to Deutsche Bank chief China economist Ma Jun.
Jun further said that wealth-management product defaults contain the ability of risky issuers to borrow excessively from the market, reported Bloomberg.
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"We believe that its spillover effect will be very limited but its long-term implication is very positive, as permitting some wealth-product management defaults is an important step towards reducing systemic risks," Jun added.
China’s State Council has restricted controls on shadow banking with rules targeting off-the-book loans to clamp down on hidden lending.
Bank of America China economist Lu Ting was quoted by Bloomberg as saying that the trust industry needs a blow up to improve market price risks.
"Even if those stakeholders can manage to avoid defaults of this CCT trust loan, we believe some trust loans, especially some mining trust loans, will default sooner or later," Ting added.
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