By James Saft
(Reuters) – Sometimes it can be hard to understand just what exactly China’s regulators are trying to achieve.
Take, for example, two interesting but fundamentally conflicting stories in the past week: the bailout of a trust product and discussion of a Tobin tax on financial transactions.
The forces behind these two stories are pulling against one another, with the shadow banking bailout creating a moral hazard enticement for the capital flows the Tobin tax is intended to stem.
In a deal reportedly orchestrated by Chinese authorities, a $495 million wealth management product called Credit Equals Gold averted default this week, though investors will be singed by the loss of some promised interest payments. The deal, originally raised by China Credit Trust for an investment in a coal mining company and sold through the Industrial & Commercial Bank of China Ltd., is part of a burgeoning $6 trillion shadow banking sector.
While allowing the high-yielding deal to default would have dealt a blow to the banking sector, it would also have sent the much-needed message that risk and reward in China are connected. But with investors taking the rewards and someone else bearing the risks, moral hazard is the obvious outcome.