China has shifted the focus of its financial policy toward controlling risks, underscoring the desire of the nation’s policymakers to contain systemic risks and ensure financing for real economic activities, such as providing goods and services.
In the Government Work Report, delivered to the National People’s Congress, the country’s top legislative body, Premier Li Keqiang warned about the accumulation of risks in areas such as nonperforming loans, bond defaults, shadow banking and internet finance.
While the overall risks are controllable, the Premier vowed the government will be vigilant toward financial risks and will build a “strong firewall” against them.
This year, the top leadership has made the prevention of financial risks a key priority, as evidenced by the tone-setting Central Economic Work Conference in December.
The emphasis on curbing financial risks also reflects the government’s concerns about the rising trend of “exit the real, enter the fake”, whereby companies abandon real economic activity and seek financial speculation instead.
The Premier’s pledge has been echoed by the nation’s legislators and political advisers, who have urged tighter supervision and greater regulatory coordination in the financial markets at the ongoing two sessions, one of the country’s biggest annual political events.
The latest evidence of tighter risk control are the coordinated efforts by the People’s Bank of China, the central bank, and the regulators of the banking, securities and insurance industries to draft a comprehensive regulatory framework to tackle the risks inherent in the opaque investment products sold to retail and institutional investors.
Zhou Xiaochuan, governor of the People’s Bank of China, said there is excessive speculation in the country’s asset and wealth-management sector, and the central bank and other financial regulators have reached a consensus on tightening regulations on the industry. Detailed policies will be unveiled soon, he added.
While the draft regulations are still under discussion and subject to change, analysts said they will create better synergy among the various regulatory bodies, and will also help to rein in risks in the country’s rapidly growing shadow-banking sector, in which some products are often unregulated or are provided by unauthorized lenders.
“Such a framework would be credit-positive for banks, because it would enhance the regulatory capacity to manage the growth of shadow-banking sectors, such as banks ‘wealth-management products,” said Nicholas Zhu, senior analyst at Moody’s Investors Service.
By the end of last year, the outstanding value of Chinese banks’ off-balance-sheet wealth-management products exceeded 26 trillion yuan ($3.8 trillion), a rise of 30 percent from a year earlier, according to the PBOC.
Guo Shuqing, the newly appointed chief of the China Banking Regulatory Commission, has warned about the opaque nature of many investment products.
“Some financial products ... are invested in each other, with no one really knowing the underlying assets or the final destination of fund flows,” he told a recent media briefing.
The draft rules to regulate China’s asset management industry will prohibit off-balance-sheet wealth-management products sold by banks from investing in risky and less-liquid credit assets.
The rules will also ban financial institutions from offering guaranteed returns to investors; a practice intended to attract retail investors who often fail to distinguish between wealth-management products and regular bank loans.
“We recognize that by fostering less risk with greater constraints, the potential reforms call for greater transparency, which would increase investor confidence in investment funds and benefit the long-term growth of the sector,” said Vanessa Robert, a senior credit officer at Moody’s Investors Service.
The regulators have adopted a string of measures to curb financial risks and the domestic asset bubble, including capping the amount and frequency of secondary share offerings by listed companies and tightening checks on radical investment by insurers.
The regulators have imposed hefty fines on insurers for violations of investment rules and vowed to capture big financial “crocodiles”, or unscrupulous operators, and others who wield their capital power to manipulate the stock markets.
Balanced, sustainable growth
In the Government Work Report, China lowered this year’s growth target to about 6.5 percent, while reducing the target for broad money-supply growth to 12 percent.
Economists said trimming the overall growth target will likely give policymakers greater leeway to ensure financial stability and more balanced and sustainable growth.
“The further reduction of the annual growth target is appropriate against the backdrop of China’s continued efforts to reduce overcapacity, corporate sector deleveraging and destocking in the housing market,” said Zhu Haibin, chief China economist at JPMorgan.
“All these are necessary steps to contain risks and to achieve a more balanced and sustainable growth model in the long run, but they are likely to weigh on growth in the near term.”
He added that the first quarter of the year may see a tightening bias in the central bank’s financial stability operations, as part of the government’s effort to contain financial risks.
Zhao Yang, chief China economist at Nomura Securities, warned that shadow-banking activity has shifted from financing the real economy to other areas, such as speculation in capital markets.
However, he added that the synergy of financial regulation and improved economic growth in the last quarter has pushed financing via the shadow-banking sector back toward the real economy.