By Li Yanping and Nipa Piboontanasawat
Sept. 18 (Bloomberg) -- U.S. regulators failed to manage the risks of new financial products and China needs to learn the lessons to avoid its own meltdown, former central bank deputy governor Wu Xiaoling said.
``The U.S. crisis reflects regulatory problems in the U.S. and innovative financial products that ignored basic economic rules,'' Wu told a financial conference in Beijing today. ``The U.S. crisis today would be China's tomorrow if financial products such as securitization are introduced without proper risk-control measures.''
China has resisted years of pressure from U.S. Treasury Secretary Henry Paulson to open its financial system more quickly and add new products. Those barriers helped the nation limit its losses and writedowns from the credit-market crisis to less than 1 percent of the $516 billion global total.
``Now is the time for the Chinese to say that `you didn't do it quite right either,''' said David Cohen, an economist at Action Economics in Singapore. ``The world is very dependent on China to help cushion the downturn.''
This week, the crisis drove Lehman Brothers Holdings Inc. into bankruptcy and forced American International Group Inc. into the hands of the U.S. government. Merrill Lynch & Co. sold itself to Bank of America Corp. Morgan Stanley is weighing a merger with Wachovia Corp. and other banks, people familiar with the matter said.
Asian Stocks Tumble
Asian stocks tumbled to the lowest in three years today while gold and U.S. Treasuries surged as concerns mounted that more financial firms will collapse. China's benchmark CSI 300 Index fell 5.1 percent as of 1:27 p.m. in Shanghai.
Paulson said last year that China risked wasting trillions of dollars in resources and lost economic potential unless it rapidly opened its capital markets.
``An open, competitive and liberalized financial market can effectively allocate scarcer resources in a manner that promotes stability and prosperity far better than government intervention,'' Paulson said in Shanghai in March last year. ``Time is of the essence.''
China's government may thwart new financial products including derivatives and enhance risk-management practices to avoid a U.S.-style crisis, the bank regulator's deputy research chief, Fan Wenzhong, said today at the Beijing conference. He's also a former Lehman economist.
Stability `Not Speed'
The aim of China's financial reforms is ``not speed, it's about stability,'' he said.
In the past three years, China dropped a decade-old currency peg to the U.S. dollar, introduced foreign-exchange swaps and forwards and expanded the bond market as the government moves to a more market-driven financial system.
It's yet to allow margin trading -- where investors borrow money to buy shares -- or futures contracts based on equity indexes. The central bank said last year that it was tightening disclosure rules on sales of asset-backed bonds.
U.S. banks ``dared'' to lend to riskier borrowers in the hope that a housing boom would continue and interest rates would stay low, Wu said. Sellers of financial derivatives ``abandoned the principle of letting clients fully understand their risks,'' she said.
Crisis `Far From Over'
Wu, the deputy director of the Financial and Economic Affairs Committee of the National People's Congress, which is China's legislature, wouldn't say when the crisis may end.
``No one really knows how many times these subprime derivatives were repackaged and how many times the risks were amplified, so the crisis is far from over.''
China's losses and writedowns are $4.3 billion, according to Bloomberg data.
The nation's stocks fell today as international credit markets seized up, stoking concern that more financial companies will collapse. Industrial & Commercial Bank of China Ltd., which has $151.8 million at risk because of the Lehman collapse, dropped 4.7 percent.
To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net
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