China should make great efforts to identify, warn of and handle financial risks as early as possible so that the risks can be “nipped in the bud”, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission.
“By making prudential monitoring indicators, conducting pressure tests, straightening up standards and implementing early intervention, we have effectively contained the accumulation of risks in certain areas that have comparatively large hidden hazards of posing a systemic risk to the financial system, such as real estate lending, local government debt and internet finance,” said Guo at the Lujiazui Forum 2018 on June 14.
Financial administrators have prioritized State-owned enterprise and local government deleveraging. With the rapid growth of shadow banking and cross-sector financing, the administrators have started to crack down on irregular financial activities and stemmed the flow of banking and insurance funds from the real economy, the part of the economy that produces goods and services, to the virtual economy, he said.
Growth of shadow banking assets is expected to be constrained this year due to the tight regulations. These include banks’ off-balance sheet wealth management products and asset management products developed by non-banking financial institutions. Trust loans and entrusted loans are also under the regulatory spotlight, said global credit ratings agency Moody’s in its latest edition of Quarterly China Shadow Banking Monitor report.
According to Guo, the total asset growth of the banking sector slowed by more than 20 trillion yuan ($3.13 trillion) year-on-year, while the credit growth of the sector stood at more than 12 percent year-on-year.
Currently, the ratio of loans that are past the due date by 90 days or more to nonperforming loans is lower than 100 percent, falling from nearly 120 percent at its peak. Banks have also disposed of 1.9 trillion yuan of bad loans since 2017 with strengthened efforts.
During the country’s crackdown on illegal fundraising, regulators tried various measures to make investors aware of the fact that high risks are associated with high returns, and that they should be prepared to lose the entire amount of their principal for any investment with an estimated return of more than 10 percent, Guo said.
“The prevention and mitigation of financial risks is not only a tough battle but also a protracted one,” he said.
Priority concerns of Chinese leaders to fight financial risks include accelerating the adjustment of corporate structures and establishing a responsibility and financial loss sharing mechanism among enterprises, banks and the government. It is also important for the country to properly handle corporate debt defaults by implementing differentiated financial policies for different companies based on their state of operation, he said.