China hardens financial regulation to stamp out risks to growth

By Li Hong Source:Global Times Published: 2017/7/31 14:53:39

Preventing systemic financial risk -- like the US sub-prime crisis in 2008 that caused a meltdown of American finance and led to the Great Recession -- is at the top of the agenda of China's central government.

In a move of utter prudence, Beijing this month decided to phase in a new institution - The Financial Stability and Development Committee under the State Council, China's cabinet - to snuff out any sparks that might ignite a financial fire and burn down the house.

Detailed functions of the committee are to be revealed in the coming months, but probably it will take the dominant position to harness and coordinate policies coming out of China's central bank and the three powerful regulators of the finance industry - banking, securities, and insurance.

The People's Bank of China (PBC), the central bank, will remain the leading monetary policymaker, guiding the world's second-largest economy on a trajectory of sound and fairly fast growth, while preventing outbreaks of deflation or inflation.

For the time being, the working office of the new Financial Stability and Development Committee is at the PBC, meaning that the bank also plays an active role in preventing systemic financial risks.

Beijing's aggressive move to harden financial regulation and manage risk is far-sighted and commendable, economists said, particularly as China's debt financing expands and its equity markets are subject to frequent bouts of volatility.

New banks, both State-run and privately owned, are springing up like bamboo shoots in China's 30-odd provincial-level regions. Their emergence is expected to foster a strong financial services sector to back up local economic growth, while cushioning the pressure of fierce competition once the government decides to open the nation's finance industry wider to foreign banks.

Nevertheless, while Chinese lenders vie to lend unprecedented amounts to businesses, some start-ups are running into financial difficulties, such as LeEco Corp. Beyond rising bad debt at Chinese lenders, the China Banking Regulatory Commission has pointed to risks in other fields, including local government debt, Internet financial fraud and off-books "shadow banking."

To some extent, risks have become increasingly interconnected among financial products, so that failure in one product could cause a chain reaction, analysts said.

Anticipated interest rate hikes by the US Federal Reserve this year and next have unnerved the decision-makers in China, who worry that, if not properly managed, the impact could lead to capital flight and increased pressure on China's currency.

Also, soaring housing prices in most of China's first- and second-tier cities have economists worried about a bursting property bubble, which might have an adverse impact on banks' mortgage portfolios.

Presiding over the National Financial Work Conference earlier this month in Beijing, President Xi Jinping said that guarding against systemic financial risk is the "eternal theme" of financial work. The prevailing stance among China's top policymakers has shifted from accelerating financial market reform and innovation toward resolutely maintaining financial sector safety, observers said.

Last month, the IMF urged China to take prompt action to stamp out risky behavior by corporations and lenders, and get debt financing under strict control. In May, the credit rating agency Moody's lowered China's sovereign credit rating for the first time since 1989, saying that China's financial strength would be eroded with "economy-wide debt continuing to rise as potential growth slows."

Extreme volatility in the country's stock and housing markets, as well as its currency, in the past two years have sent chills through the central government. These market movements have sent an explicit warning that, if regulators don't slam the brakes on equity speculation and start to stamp out the risks, what happened in 2008 on Wall Street could happen in China.

The government's regulators have listed reducing risk in China's financial system as a top priority in the second half of 2017. All commercial banks are being asked to look closely at borrowers, especially those trying to make acquisitions abroad. A dozen prominent companies, including Dalian Wanda, Anbang Insurance, Fosun, Suning and the HNA Group, have been told to check their balance sheets closely. Dalian Wanda has sold a huge portfolio of hotel assets to beef up its capital position.

China witnessed a huge flight of its foreign exchange reserves in 2015 -- primarily driven by large overseas asset acquisitions by some of those same Chinese companies as well as wealthy Chinese families purchasing luxury homes in developed countries.


The author is an editor with the Global Times.


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