One of China’s leading economic experts says that systemic risk is still a major issue for the the country’s financial system.
Speaking at the 2018 Chinese Economy 50 Forum in Beijing over the weekend, Huang Yiping (黄益平), Professor Economics at the China Center for Economic Research, Peking University, outlined five key reasons why “the issue of systemic financial risk still hasn’t passed.”
Chief amongst these reasons is that it is becoming increasingly difficult for the Chinese government to bear “hidden guarantees” the way it has done in the past, impeding its ability prop up the financial system.
“China has always engaged in a comparatively high level of financial interference, which has supported financial stability,” said Huang.
“However, this phenomena is now changing, because of continued hidden guarantees, which could eventually trigger many issues.
“Interest rate marketisation will unleash financial risk, and it will be very difficult to maintain hidden guarantees as we did in the past.”
Huang highlighted the risk brought by high leverage levels as another major problem Chinese finance system.
“Overall bad leverage is on the rise, while good leverage is on the decline,” said Huang.
“Deleveraging has obtained some results of late, and it would appear as though corporate leverage ratios are basically stable.
“However, government and household leverage ratios have started to rise, and this is an issue which warrants concern.”
The third reason for systemic financial risk in China outlined by Huang is the issue of zombie state-owned enterprises with abnormally high leverage levels.
“When it comes to state-owned enterprises we are primarily concerned about zombie enterprises,” said Huang.
“Zombie enterprises have average debt-asset ratios of around 76%, as compared to a 51% for normal enterprises.
“If we can truly clear out zombie enterprises, it would be of benefit to deleveraging, and I believe it would also be of benefit to controlling our financial risk.”
The fourth reason for systemic risk highlighted by Huang is the latest round of financial innovation, including online finance and fintech.
“We are also seeing new forms of risk…in particular risk in relation to shadow banking and online banking,” said Huang.
“At present we feel that online finance probably doesn’t yet comprise systemic risk, but the potential risk still warrants our attention…in particular cooperation between many online finance platforms and traditional financial institutions, which could trigger all kinds of new problems.”
The final reason for financial risk in China highlighted by Huang is regulatory problems which exacerbate risk levels.
“There are many problems [with regulation]…coordination between various departments isn’t particularly good, and there are still many regulatory blanks,”said Huang.