Time to purge systemic risk from economy

Source:Global Times Published: 2017/7/31 21:08:39

Illustration: Peter C. Espina/GT

Over the past decade, China's economic growth gradually slowed from 14.2 percent in 2007, the peak of the previous decade, to lower than 7 percent currently. While GDP growth has been on a downward trend, the nation's total debt-to-GDP ratio has kept rising, from around 248 percent in 2015 to about 260 percent in 2016, according to our estimation and calculations. This means that Chinese investment has become less efficient, with the incremental capital output ratio declining.

Meanwhile, during the slow and gradual process of China's economic reform and transformation, the central bank injected lots of liquidity into the financial system, so the broad money supply (M2) balance has totaled more than 160 trillion yuan ($23.8 trillion). In the face of such great amounts of money supply and debt, economic transformation and structural reform have to be slow. And it is inevitable that corporate revenue will decrease along with an increase in repayment risk as economic growth slows down.

In this sense, to further ensure the steady and healthy growth of the economy, it is essential to clear and release some of the risk out of the market. Otherwise, the national economy will be unable to sustain healthy and stable growth. Therefore, the economy will have to face a major conflict between steady growth and risk prevention. Only by releasing risk can we restore market confidence to really stabilize long-term growth. Nevertheless, if the hidden risk problem cannot be sorted out, it might also result in the outbreak of a systemic failure, devastating overall economic stability. In other words, we must deal with the risk problem and must address it in a proper way.

It is in this context that as early as April this year, the Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting discussing financial issues. During the meeting, financial security was discussed as an important part of national security. Solving financial problems is crucial for maintaining steady economic growth, and the seriousness of financial risk should be fully recognized. To stabilize the economy, China must reduce financial risk. The major contradiction between stabilizing growth and risk prevention should be handled properly, which means that we should carefully balance deleveraging with maintaining suitable liquidity. In other words, regulators should strengthen financial regulation, deepen financial reforms and continue a deleveraging process, but at the same time, they must maintain reasonable liquidity in the financial system so as to ensure that there will be no systemic failure in dealing with the major contradiction between steady growth and risk prevention.

It is clear that the key to dealing with the major contradiction is to release systemic risk. As we all know, there are a lot of factors that may lead to systemic risk. If we don't take the initiative to release the risk, the Chinese economy will not be able to achieve stable growth. But if we cannot release the risk in a proper way, it might spread quickly, putting an end to overall economic stability. For instance, over the past few years, various financial innovations have been highly encouraged. Nevertheless, two months ago, financial regulators at various levels have rushed to tighten regulations. The latest lack of regulatory coordination has immediately reminded the public of the "money shortage" fear in 2013.

In this sense, while we should guard against a "black swan" event from the international economic field, I think we should also be alert to the "black swan" risk from domestic markets. Where may it come from? First, as China puts into place measures to restrain five aspects of the real estate market - housing purchases, mortgages, prices, sales and commercial property - we should be alert to the possible result once there is a consensus of pessimistic expectations in the market. Second, considering the pressure from risks, we need to strengthen financial supervision. However, in the face of the accumulated financial risks, we should carefully choose our regulatory strategy. We must be careful about the coordination among various regulatory authorities so as to avoid economic turbulence and prevent major shocks to economic stability. Therefore, generally speaking, we need to be prepared with precautions and a general strategy for coping with a potential "black swan."

The article was compiled based on a speech made by Xia Bin, counselor of the State Council, on July 15 at a forum in Shanghai. bizopinion@globaltimes.com.cn

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