China’s Banking Regulator Warns of Black Swans and Grey rhinos

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In an interview with the Chinese Communist Party’s flagship newspaper Guo Shuqing, the head of the China Banking Regulatory Commission, warned that “black swans” and “grey rhinos” continue to pose a threat to the country’s financial stability, and pointed to the need for greater curbs on real estate bubbles and local government debt.

The People’s Daily interview with Guo Shuqing entitled “Effectively Waging the War to Prevent and Diffuse Key Risks” (打好防范化解重大金融风险攻坚战) was published on 17 January.

On regulatory undertakings in 2017

“In 2017…financial regulators addressed the three areas of interbank activities, wealth management products and off-balance sheet business, undertaking multiple forms of specialised and comprehensive administration.

“We achieved some initial successes in curbing the tendency for capital in the banking sector to shift towards the empty from the real. The internal leverage ratios of the financial sector continued to fall, with over 100 banks actively shrinking their balance sheets.

“With full year new loan growth of 12.6%, the total assets of the banking sector grew by only 8.7%, for a year-on-year deceleration of 7.1 percentage points.

“Interbank assets and liabilities contracted for the first time since 2010, and interbank wealth  management products saw a net reduction of 3.4 trillion yuan compared to the start of the year. Bank wealth management products saw a growth reduction of over 5 trillion yuan due to large-scale deceleration. Growth in the overall scope of off-balance sheet business fell each month, displaying an overall tendency for contraction.

“In 2017 CBRC issued a total of 3452 administrative penalties, creating a strict regulatory atmosphere, and markedly increasing compliance awareness in the banking sector.”

On existing risks, black swans and grey rhinos

“At present risk in China’s financial system is controllable overall, but because of multiple factors we are still at a stage where multiple forms of risk can still readily arise, and continue to face complex and challenging circumstances.

“The rebound pressure of the non-performing assets of banks remains considerable, and a significant number of financial institutions have inadequate internal controls, while the stock of shadow banking assets remain quite high.

“Illegal and non-compliant financial conduct still regularly occurs, and various international uncertainties could create shocks for the financial system. These comprise hidden dangers in the form of ‘grey rhinos’ and ‘black swans’ that threaten China’s financial stability.

“Because finance occupies a central position in the economy, financial risk is extremely sudden, contagious and hazardous. Once major systemic financial turmoil occurs, it can have an extremely severe impact upon economic and social development…for this reason the prevention and diffusion of financial risk is the top priority.”

Regulatory undertakings in 2018

“The goals are to achieve effective control of macro-economic leverage ratios, raise the adaptability of the financial structure, markedly strengthen the ability of the financial sector to service the real economy, comprehensively strengthen hard restraints, and effectively prevent and control systemic risk.

“To this end, [we] need to vigorously reduce corporate debt ratios, contain leverage ratios in the household sector, strictly standardise cross-sector financial products and continue to dismantle shadow banking.

“[We will] deal with high risk banking sector institutions, firmly strike against various forms of illegal fund-raising activity, continue to suppress the tendency for real estate bubbles to form, and actively cooperate with local government to combat hidden debt.”

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