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In financial markets, is "too big to fail" a more reasonable concept or is "too big to control" more worthy of attention? There is no definite answer because it all depends on timing.
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In fact, the antecedent of "too big to fail" must be "too big to control" - that is, if there were no "too big to control" enterprises, there would be no "too big to fail" problem.
The best example of this can be found in the global financial crisis of 2007-2008.
If US regulators had made and implemented effective policies to prevent financial institutions from excessive borrowing, and supervised derivatives trading by these institutions, then Lehman Brothers would have not gone bankrupt. However, the securities firm raked up bad debts due to overzealous lending during the housing bubble and its debt ballooned to more than US$600 billion before it collapsed, triggering the global financial tsunami.
Therefore, firms that were called "too big to fail" in the aftermath of the 2008 financial tsunami are actually the one which had become "too big to control" before the crisis.
So, to prevent the occurrence of systemic risk, financial markets should not make excuses such as "too big to fail" to protect companies which are riddled with holes, but make policies to prevent these institution from becoming "too big to control."
But what exactly is an enterprise that is too big to control?
In financial markets, any company could support its development through excessive borrowing.
And even though the market capitalization of these enterprises may balloon into billions or even trillions, they could still collapse in a short period of time.
But because these firms have become too big to control, any bid to cut them down to size could trigger market volatility.
This is the dilemma that regulators now face with the embattled developer China Evergrande.
Because of the huge debt problems faced by many mainland housing and real estate developers, the central government last year drafted new financing rules for them under a "three red lines" policy, which not only capped borrowing limits but required all these enterprises to reduce their debt as soon as possible.
Under these regulations, Evergrande and other indebted developers have to sell assets to reduce their debt.
Of course, this action was clearly aimed at preventing the bad debt bubble from further expanding and exploding.
Because if the market is not able to bear the load before the blast, it can cause serious systemic risk. But while the new rules are clear and make sense, if every highly indebted developer is forced to reduce debt and sell assets, will the market be able to digest these assets?
And if the market is unable to absorb the relevant assets, will these enterprises fail to meet the "three red lines" and collapse, causing systemic risks in the market?
More worryingly, a lot of these highly indebted developers have already grown into entities worth hundreds of billions.
That is to say, they have possibly become too big to control, so their problems cannot be simply solved by a change of policy with specific time frames.
Trying to put a lid on their exposure is like trying to disarm a ticking bomb.
One cannot dismantle a bomb by simply cutting the red, yellow or blue wires as one chooses.
It takes time to understand the mechanisms - of how the bomb has been wired - and then it needs to be carefully dismantled step by step so as to avoid accidentally detonating it and killing the entire bomb disposal squad.
And while China's recent reform and rectification drive makes sense, there are many who worry that the continuing monetary easing and explosion of debt in the western world, led by the United States, may lead to a bigger problems in the future.
Now this might have prompted China to speed up the pace industry regulation and reform, but if the "bomb" is dismantled too hastily, it could lead to a disaster.
In addition, the current monetary and fiscal policies of western countries may also be a step in the process of "defusing the debt bomb." These are points worth considering and we will discuss them next week.
Andrew Wong is chairman and CEO of Anli Securities
