China to Open Up Financial Markets with Tougher Regulations
China’s central bank (PBOC) Governor Zhou Xiaochuan, 69 anni, says that the country’s financial system is becoming significantly more vulnerable due to high leverage.
Zhou who has made some stern warnings recently about debt levels in the world’s 2nd-largest, soon to be the world largest economy.
Latent risks are accumulating, including some that are “hidden, complex, sudden, contagious and hazardous,” even as the overall health of the financial system remains good, Zhou wrote in an article published on the People’s Bank of China’s (PBOC) website Saturday.
Zhou wrote, that the nation should toughen regulation and let markets serve the real economy better. The government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the Mainland.
“High leverage is the ultimate origin of macro financial vulnerability,” wrote Zhou. “In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.”
Zhou’s comments signal the world that China’s policy makers remain committed to the campaign to reduce borrowing levels across China’s economy.
There have been some concerns that regulators may intensify this drive after last month’s 2X-a-decade Communist Party Congress (CPC) helped push yields on 10-year sovereign bonds to a 3-year high.
Chinese bonds shrugged off the Zhou’s piece Monday, with 10-year yields down 1 bpt to 3.88% as of 11:14a local time in Shanghai, while the cost on 5-yr notes rose 1 bpt to 3.95.
The PBOC’s boss article appears to be an explanation of existing priorities, and not a signal they are changing direction or pace.
Despite the bold rhetoric around deleveraging in China, measures of credit continue to show expansion, with aggregate financing surging to a 6-month high of RMB 1.82-T (US$274-B) in September.
Corporate debt rose to 159% of the economy in Y 2016, compared with 104% 10 years ago, while overall borrowing climbed to 260%.
Zhou’s article was included in a book that was published recently to help the public and party members better comprehend the spirit of the 19th party congress, according to the official Xinhua News Agency and information on the PBOC’s website.
Zhou on risks and regulation, as follows:
- China’s financial system faces domestic and overseas pressures; structural imbalance is a serious problem and regulations are frequently violated
- Some state-owned enterprises face severe debt risks, the problem of “Zombie Companies” is being solved slowly, and some local governments are adding leverage
- Financial institutions are not competitive and pricing of risk is weak; the financial system cannot soothe herd behaviors, asset bubbles and risks by itself
- Some high-risk activities are creating market bubbles under the cover of “financial innovation”
- More companies have been defaulting on bonds, and issuance has been slowing; credit risks are impacting the public’s and even foreigners’ confidence in China’s financial health
- Some Internet companies that claim to help people access finance are actually Ponzi schemes; and some regulators are too close to the firms and people they are supposed to oversee
- China’s financial regulation lags behind international standards and focuses too much on fostering certain industries; there’s a lack of clarity in what central and regional government should be responsible for, so some activities are not well regulated
- China should increase direct financing as well as expand the bond market; reduce intervention in the equity market and reform the initial public offering system; pursue yuan internationalization and capital account convertibility
- China should let the market play a decisive role in the allocation of financial resources, and reduce the distortion effect of any intervention
- China should improve coordination among financial regulators
Have a terrific week