熊园：Financial risk can’t be ignored amid restructuring
Since mid-2016, the importance of risk prevention has gained frequent mention at meetings at various levels in China. The recently concluded National Financial Work Conference, held only once every five years, clearly stated that the nation needs to guard against financial risks.
It’s envisioned that risk prevention will remain a key issue in China in the years to come and there won’t be a regulatory shift until there are signs that the financial risks confronting the country have been fundamentally neutralized. Among the most-watched risks are housing bubbles, the local government debt problem, high financial leverage and woes concerning Internet finance.
First, the risk of a property bubble is the biggest “gray rhino” facing China. Home prices have soared in recent years and people have used leverage to buy homes, even as mortgage rates went up, causing huge bubbles in the housing market. Statistics show that household debt as a percentage of GDP hit 45 percent at the end of 2016, 1.6 times the level five years earlier and three times the level 10 years earlier. The rapid rise of the ratio can be explained simply by the fact that growth in disposable income didn’t keep up with higher home prices.
Fortunately the government has stepped up property curbs since last October and moved toward a fundamental mechanism of long-term regulation of the housing market that both suits the country and complies with market rules.
Second, the local government debt risk is seen as a sword of Damocles hanging over the head of the Chinese economy. In recent years, frequent violations of the borrowing and collateral rules by local governments have been uncovered and the scale of local government debt has surged. There is also a vast amount of hidden debt accumulated by local government financing vehicles, unregulated public-private projects and government investment funds.
Local government debt, as such, represents a huge threat to fiscal stability. The twice-a-decade financial meeting clearly said that the country will curb additions to government debt and hold officials responsible for life if they fail to do so. It was by far the harshest regulatory statement on the local government debt issue, and it also showed how serious the problem has become.
Third, financial leverage has increased. Since the 2008 global financial crisis, China’s overall debt-to-GDP ratio – as well as the debt held by households, non-financial companies, financial institutions and government departments as a portion of GDP – has been on an upward trajectory. In comparison, the US, Europe, Japan and other developed economies have largely undergone deleveraging.
It’s especially noteworthy that there have been several rounds of drastic swings in China’s capital markets since the second half of 2015. In all these cases, the “culprit” is believed to have been the use of leverage such as margin lending and a form of equity leverage financing known as umbrella trusts.
Further, small and medium-sized Chinese banks have in recent years expanded their assets at an annualized rate exceeding 30 percent. In addition, the tendency of many in the asset management sector to keep capital in the financial system and out of the real economy is being facilitated by the use of leverage.
It’s thus understandable that after the annual two sessions earlier this year, many government bodies including the central bank, the regulatory agencies that oversee the banking, securities and insurance sectors, the Ministry of Finance, the National Development and Reform Commission and the Ministry of Commerce have all moved to toughen oversight, primarily over financial leverage.
Fourth, Internet finance is a double-edged sword when it comes to risk. It boosts competition in the financial markets, increases the efficiency of capital allocation, reduces the cost of financial services and explores the boundaries of financial services. The Internet finance sector has gained tremendous popularity in China since 2013.
However, there is still a large void in the country’s legal, regulatory and policy framework that has yet to put Internet finance under effective scrutiny. The sector remains in a stage of untamed growth, with varied problems such as illegal online fundraising, technological failures, information leaks, online fraud and peer-to-peer lending firms whose bosses abscond with investors’ money.
Given that Internet finance has grown to be a new source of risk facing China, it is expected that the industry will experience some hard times in years to come.
A vibrant financial sector can invigorate the economy and a stable one can steady it. China is undergoing a critical economic restructuring and the importance of preventing financial risks and ensuring financial stability can’t be overemphasized. Regulators and policymakers must seek a balance between financial regulation and development and also between financial reform and innovation. Risk prevention and regulatory tightening are more than just words on paper; they call for craftsmanship, professionalism and the art of wisdom.