Moral hazard and the mysterious “keepwell” agreements

CHINA ADVISORY - Report 22 May 2020 by Andrew Collier

The two dominant themes of Chinese economic policy over the past several years have been the growing use of private capital for state ends, and more recently, a reluctance to engage in a large-scale “Chinese QE.” Concerns about excess state debt have been imprinted on Xi Jinping by economic head and Vice Premier Liu He, former PBOC Governor Zhou Xiaochuan, and other senior and trusted economic policy officials.

To that list I would also add the gradual attempt to delink the Chinese state guarantee from economic transactions – an elimination (over time) of the moral hazard implicit in many parts of the Chinese economy. The latest test of the “end of moral hazard” is the current status of the offshore bonds of Beijing Founder Group and its mysterious “keepwell” clause – a very fuzzy use of moral hazard. What does this mean for China’s global debt?

Now read on...

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