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William Pesek

China Isn't Ready for Creative Destruction

China's system of moral hazard won't be worth much until it passes far more ambitious financial reforms.
Nothing to fear.

Nothing to fear.

Photographer: Feng Li/Getty Images

Has China's Joseph Schumpeter moment arrived? China has suggested its decision to roll out deposit insurance for bank accounts beginning on May 1 will usher in a wave of creative destruction, chastening the cronyism that plagues the country. And there is some logic to the official spin. There's a flip side, after all, to Beijing's declaration that normal consumers will be kept safe in a period of market turmoil -- namely, the banks themselves could be permitted to go bust.

If there were reason to believe that would really happen, it would be an important step toward straightening out China's financial system, and to achieving the country's longer-term goal of making the yuan a global reserve currency. Unfortunately, China's system of moral hazard won't be worth much until it passes far more ambitious financial reforms. Here are three reasons why.