The Art and Science of Crisis Response
A high profile Chinese take on financial crisis management authored by Xu Zhong, Zhu Manzhou, and Ren Qing of the National Association of Financial Market Institutional Investors (NAFMII) and endorsed by legendary PBOC Governor Zhou Xiaochuan is given a featured review by Ling Huawei managing editor of Caixin Media and Caixin Weekly!
“The Art and Science of Crisis Response” published early this year by the People’s Daily Press provides a handbook for managing modern economic crises. Beginning with the Great Depression in the U.S. about a century ago, the book mainly deals with financial and fiscal crises around the world over the past 30 to 40 years. It examines 20 international financial crises and 10 in China, and provides a candid analysis of the issues currently facing China. Some of the cases are fairly recent, such as the liquidity crisis that suddenly hit Silicon Valley Bank in 2023. Others include the reform of China’s state-owned banks at the beginning of this century, the subprime mortgage crisis in the U.S. in 2008, and the bursting of Japan’s economic bubble in the 1990s.
Some important messaging here?
The book discusses the relationship between moral hazard and systemic risk. The damage caused by systemic risk far exceeds that caused by moral hazard, so dealing with and preventing the spread of systemic risk should take precedence. Moral hazard and institutional improvements should be addressed after systemic risks have been contained. In practice, decisionmakers need to consider timing when dealing with risks and evaluate which institutions should be rescued and which should not. They shouldn’t simply push the problems onto the financial system in the hope that it can absorb them. Taking advantage of maneuver space in the financial system’s balance sheet to delay risk exposure is not a fundamental solution to a crisis. Merging troubled institutions or forcing healthy institutions to shoulder the burden of absorbing bad performers are only stopgap measures that should be avoided. Nor should decisionmakers rely on the passage of time, hoping that problems will gradually disappear without fundamental reform. These practices merely postpone risks rather than resolve them effectively. That said, why is it that China has always proven successful by consistently taking the approach of delaying risk resolution over the past two to three decades? The short answer is that different times have different solutions. When the economy is prospering, it has more ability to absorb crises. But as we enter a downturn in economic growth, the challenge of managing risks becomes increasingly difficult.
Source: Caixin Global