Daily Management Review

China is stepping up the fight against financial risks


Last weekend, Chinese President Xi Jinping said that the country's central bank will play a more significant role in protecting against risks, and called for increased measures to protect the financial system and modernize its regulatory framework, reports Bloomberg.

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Shares of Chinese companies with small capitalization fell on Monday amid fears of tightening regulation. This, in turn, led to a decline in the stock indices of the country.

Xi Jinping told that the Chinese government is going to establish the Committee for the Development of Financial Stability under the State Council, the state media reported, without clarifying the committee's links with the People's Bank of China. Financial security is part of national security, and finance should serve the real economy better, Xi said.

In his speech, Xi noted that sound monetary policy, the goal announced in December, should be firmly adhered to, and the People's Bank of China should assume a more significant role in macro prudential policy. He also called to reform the renminbi exchange rate, improve the foreign exchange market system and aim at steady progress in the internationalization of the renminbi, China's state media reported.

China is stepping up efforts to ensure stability on the eve of the XIX Congress of the Communist Party of China, after which top leadership in the party and in the country will change. Xi Jinping brought a new level of risk containment in the financial industry with a volume of $ 40 trillion.

Establishment of the committee deserves attention, although the meeting was not particularly surprising, notes Ming Ming, a former representative of the People's Bank of China, who now heads the bond market research department at Citic Securities Co. The committee’s name means that it should be a ministerial-level structure of the ministry level, be directly administered by the State Council and monitor overall financial coordination, Ming Ming wrote in his report on Sunday.

China will actively prevent and eliminate systemic financial risks, as well as intensify efforts to reduce the level of use of borrowed funds in the economy, says Xinhua news agency. Xi Jinping also called for greater accountability of regulators, saying that it was "non-performance" if they failed to identify risks in time and get rid of them. The PRC President stressed that it is necessary to improve coordination of financial regulation and strengthen weak links in supervision.

"A big focus on risk prevention will prevent much-needed reform in the financial market, particularly in the emerging derivatives markets," said Victor Shih, a professor at the University of California, San Diego, who studies China's politics and finances. "If regulation is too tough, financial talents can leave the country," he added.

Premier of the State Council Li Keqiang also spoke at the meeting, saying that it is necessary to moderate growth in lending and maintain "basically stable" liquidity, the state television reports. He supported the "professional, consolidated, insightful" regulation of all financial enterprises to reduce risks.

Rabobank’s senior Asia-Pacific market strategist in Hong Kong Michael Every welcomes more centralized regulation in China. At the same time, he said, the plan means that China wants financial risks to be in pure form a mechanism of national development, rather than speculation.

"It is worrying that another sphere of the economy is being considered within the framework of national security," Every said. "This gives a clear signal that we will never see a new fall, which means that there will be no volatility. This means absence of real markets or, possibly, lack of a real role for foreign players as price-makers". 

The Chinese authorities’ statements are reflecting growing vulnerability of the financial system and growing desire of the government to prevent a destabilizing shock, said Rajiv Biswas, chief economist for the Asia-Pacific region of IHS Markit in Singapore. "The main priorities for the People's Bank of China and the new commission will be stabilization of non-performing loans in the banking system of China, management of risks of shadow banking and risk management associated with the growth of corporate debt," he said.

source: bloomberg.com