The head of the People’s Bank of China said that reform and opening of the country’s financial sector is the key to prevention of systemic risk, while also warning of the threat to stability posed by excessive leverage.
In an opinion piece published by the People’s Daily on 22 November entitled “Firmly Guarding the Base Line Against the Onset of Systemic Financial Risk” (守住不发生系统性金融风险的底线) PBOC governor Zhou Xiaochuan writes that “actively preventing systemic financial risk must depend upon acceleration financial reform and opening.”
“Reform and opening has improved the overall health of the financial system,” said Zhou. “Especially since the 18th National CCP Congress, China’s monetary policy and financial regulatory system has dovetailed with international standards, with exploration of the creation of a macro prudential policy framework, the establishment of a deposit risk insurance system, and strengthening of the ability to prevent systemic financial shock.
“[Its] efficiency in servicing the real economy and risk-resistance capability has markedly increased…the social financing stock increased from 76.7 trillion yuan in 2011 to 156 trillion yuan in 2016, while the direct financing percentage rose form 15.9% to 23.8% over the same period.”
Zhou hailed the internationalisation of the Chinese yuan as expediting “continuous improvements in the financial system.”
“The inclusion of the renminbi in the IMF’s special drawing rights basket has markedly raised the status of China’s participation in international financial regulation.
“The participation of certain international financial organisations in China’s financial sector expedites financial market competitiveness, and raises the operating level and risk resistance capability of domestic financial institutions, while some domestic financial institutions have achieved positive progress in advancing abroad.
“At present China’s four big banks are systemically important global financial institutions, with non-performing loan ratios that are low by banking sector standards, relatively high capital adequacy ratios and profit earning capability which is at a leading world-class level.”
Zhou, who has previously warned of the possibility that China could face a “Minsky Moment” financial collapse, pointed to high leverage levels as the chief source of risk for the Chinese economy.
“High leverage is the chief source of fragility for the financial sector from a financial sector,” said Zhou. “This is embodied in the real economy by excess debt, and in the financial sector by an overly rapid expansion of credit.
“At the end of 2016 China’s total leverage ratio was 247%, with corporate sector leverage reaching 165%, rising above the international warning level.
“For some state-owned enterprises debt risk is pronounced…some local governments are also using service purchases and various forms of ‘debt discussed as equity’ to increase their leverage levels.”
