China International Capital Corp (CICC), a prominent Chinese investment bank, urged regulators in a December 4 note to allow such products to fail. Most are not guaranteed by banks, analysts say. "If we don't take this opportunity to let a relatively small-scale contract be broken, it will only reinforce the attitude that these products have a rigid return and a limitless guarantee," CICC said. Forcing Hua Xia to stand behind these products would cause "no end of trouble", it added.
The default of a Chinese investment plan has handed Beijing a tough choice: bail out investors and endorse moral hazard or let it fail and risk unnerving those who hold at least $1 trillion in so-called wealth management products.
US financial regulators faced a similar decision four years ago and decided on unlimited bailouts, because the alternative was in their minds an apocalyptic financial system crash.
Is that really the only alternative?
Update: What this means is that China is on the verge of a major financial panic.
Update: China Warns of Rising Financial Risks Dec 26 2012
Due to soaring bank loans, with lending to the property sector and local governments a particular concern, China's financial system is facing increasing risk, the finance ministry warned Wednesday.