China has pledged to increase its measures in an effort to strengthen its troubled banks and small enterprises; all the while continuing to crackdown on shadow banking and property speculation. This is a difficult balancing act for the nation as it risks an uncontrollable buildup in bad debt at its traditional lenders.
With increasing concerns mounting over the nation’s US$45 trillion financial system, the central bank and its top financial regulator revealed several new details over the first weekend of the year on how to combat risks amid one of the country’s slowest economic growth periods in three decades.
The People’s Bank of China has traditionally been reluctant in over-pumping stimulus into the economy. However, it has recently come out and stated that it will win the battle against increasing financial risks, underscoring its role as a lender of last resort while directing local governments to shore-up frontline support.
This statement follows that of the China Banking and Insurance Regulatory Commission (CBIRC), which had outlined several measures which included carving out bad loans, setting up a resolution fund, promoting mergers, capital injections, and more.
“Risk control has always been on the agenda of the authority, but compared with the previous general guidelines regulators have used strong wording in laying out very specific, drastic measures,” said Zhao Jian, head of the Atlantis Financial Research Institute in Beijing. “That’s a signal policymakers are beefing up efforts to contain financial risks this year.”
Due to the ongoing trade disputes with the US, the task of strengthening local financial institutions is not an easy one. Chinese authorities are taking a more coordinated approach to resolving the issues at more than 3,000 regional and rural lenders. A good number of these lenders are struggling with severe pileup of soured loans, eroding capital, and poor internal controls.
The banking regulator said it would improve risk management in certain areas such as real estate by preventing speculative housing deals and blocking illegal flows of funds into properties. In the meantime, the central bank also announced the building of long-term regulatory mechanisms to more closely monitor financing within the sector.
China’s financial market faces a pivotal year as it opens to full foreign ownership. The regulator, which reiterated its commitment to overseeing the opening, is in part counting on the sharpened competition to instill more discipline in its domestic firms. The country is also implementing wide-reaching changes to allow the likes of JPMorgan Chase & Co., Goldman Sachs Group Inc., and BlackRock Inc. to expand their own footprint in China.
The CBIRC also encouraged the conversion of household savings to more long-term capital investments and a greater development of corporate annuity and endowment insurance businesses. The regulator wants wealth management, insurance and trust products to be directly involved in financing and cultivating long-term investments.