Financial industry in the spotlight

Firewalls should be erected in banks to isolate risks from wealth management products and shadow banking from general deposit service.

It should be noted that Chinese banks and the financial system have benefited from continued financial repression -- regulated deposit rates, and a relatively closed capital account -- at the expense of savers.

As long as these favorable conditions for banks are not reversed, we believe a systemic crisis remains less likely, given the still State-controlled financial system.

We have been arguing that defaults and bankruptcies should be allowed to reduce the further build-up of fiscal and financial risks.

Wang Tao chief economist in China at UBS AG

A1 We think the risk of a credit crunch definitely increased in June. While overall liquidity is still abundant, and the People's Bank of China still has a lot of tools to use if it is deemed necessary, accidents could happen in the process of changing liquidity provisions or cleaning up interbank activities.

This is especially so when much of the credit expansion so far has been hidden in off-balance-sheet form and often under multiple layers of transactions, liquidity is unevenly distributed, and interbank transactions have made the system highly linked.

Therefore, the central bank and other regulators must tread very carefully in the coming months in managing the process to try to minimize the risk of unexpected liquidity disruptions or an unwanted credit crunch.