Authorities should embrace defaults in China’s financial market

In order to improve the efficiency of financial resource allocation, the price of risk must be included for any form of funds. However, at present, there’s no sign that the government would embrace defaults in China’s financial market. When the default is coming, the government will assume the debt or let the related companies to roll over the debt, which only delay or even amplify the problem in the future. In such situation, it is impossible to realize the risk pricing, not to mention about improving the efficiency of financial resource allocation at this stage. Therefore, not avoiding default and dealing with it according to market rules will be rather important principles in next step of financial reform.

（Source: http://humblestudentofthemarkets.blogspot.com）

In essence, all kinds of WMPs (wealth management products) and trust products are direct financial products, and then it’s a kind of trust relation between issuers and investors. So both buyers and sellers must bear full responsibility for their investment risks in a free market. Also, if we start with these products to cope with “default", it does not lead to systemic risk.

To be more precise, once a default occurs, we need analyze responsibilities of various parties, e.g. whether does the product raise money from qualified investors; whether does the money raising differ between public offering and private offering; whether does the issuer express clearly the legal responsibility to investors… Only when such problems have been made clearly, people could distinguish responsibilities from investors, financial institutions and the authorities, and then we can have a free market financial order.