The Chaori default does not resolve all moral hazard issues in the Chinese financial markets, but it is a step in the right direction.
In the first five days of October 2008, large corporate pension funds lost more than $100 billion of pension assets. And at the end of 2011, the aggregate funding shortfall for Fortune 1000 companies amounted to $343 billion. In examining the decisions that defined benefit plan sponsors made, Xuanjuan Chen, Tong Yu, and Ting Zhang argue that moral hazard and tax benefits play a significant role.
Although China is transitioning toward a capitalist system, SOEs continue to play an important part in China’s economic development. The involvement of SOEs has led to very little progress in the financial markets, which, in turn, has caused distortions in the allocation of capital to unproductive industries.
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