China’s central bank released results of an all-around systemic financial risk exam, including the latest stress test of the banking sector and the first-ever rating of more than 4,000 financial institutions.
Some cyclical, structural and institutional risks, accumulated over the years, are emerging but are tolerable, which will not lead to systemic financial risks, said Zhou Xuedong, director of the financial stability bureau of the People’s Bank of China.
In order to tighten supervision of the financial system, the central bank is planning to include some financial institutions on a list of Domestic Systemically Important Financial Institutions, which it said should be regulated under higher standards. “The assessment methods and supervision standards are still under study,” Zhou said on Nov 2.
The “hidden debt” of local governments and the high leverage level of nonfinancial corporations could be the riskiest factors threatening financial stability, according to the PBOC’s 2018 China Financial Stability Report.
Under the worst-case scenario, assumed by the stress test of 20 large and medium-sized commercial banks, if the nonperforming loan ratio increases by 700 percent, the banks’ overall capital adequacy ratio will drop by 3.96 percentage points.
Nonfinancial corporations’ leverage level, which last year decreased for the first time since 2011 to 163.6 percent, still contributed 65.7 percent of the overall macro leverage ratio of 248.9 percent. The high leverage level was identified by the report as the “origin” of financial fragility.
In the first quarter of this year, the central bank finished its first rating of 4,327 financial institutions, including policy banks, commercial banks and financial companies of corporate groups.
The rating results, ranking from 1 to 10, showed that 89.41 percent of the assessed financial institutions were under the grade of 8, the threshold above which the central bank will take specific measures to guide those financial institutions to reduce risks.
In addition, external risks such as trade disputes may also affect China’s financial stability and lead to nonrational fluctuations in the financial markets, said the report.
Additional messages were delivered by the country’s top decision-making body on Oct 31 to stabilize the market players’ expectations and echo their concerns.
That has eased some depreciation pressure on the currency at a crucial moment when the renminbi has weakened and moved closer to the psychological threshold of 7 yuan per dollar, the weakest level in a decade.
“These messages are overall positive for markets and the economy, as the leadership realized the challenges, directly addressed some of the major worries in the market and delivered more practical messages about policy intentions,” said Lu Ting, chief economist in China with Nomura Securities.