China's financial system is becoming significantly more vulnerable and latent risks are accumulating, including some that are "hidden, complex, sudden, contagious and hazardous", Bloomberg reported citing central bank governor Zhou Xiaochuan.
High leverage is making the financial sector vulnerable, said Mr Zhou in an article published on the People’s Bank of China’s website. He has made a series of blunt warnings in recent weeks about debt levels in the world’s second largest economy.
China should toughen regulation and let markets serve the real economy better, said Mr Zhou. The government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.
“High leverage is the ultimate origin of macro financial vulnerability,” wrote Mr Zhou. “In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.”
Mr Zhou also wrote:
- China’s financial system faces domestic and overseas pressures; structural imbalance is a serious problem and regulations are frequently violated
- Financial institutions are not competitive and pricing of risk is weak; the financial system cannot soothe herd behaviours, asset bubbles and risks by itself
- Some high-risk activities are creating market bubbles under the cover of "financial innovation"
- More companies have been defaulting on bonds, and issuance has been slowing; credit risks are impacting the public’s and even foreigners’ confidence in China’s financial health
- Some Internet companies that claim to help people access finance are actually Ponzi schemes; and some regulators are too close to the firms and people they are supposed to oversee
- China’s financial regulation lags behind international standards and focuses too much on fostering certain industries; there’s a lack of clarity in what central and regional government should be responsible for, so some activities are not well regulated
- China should let the market play a decisive role in the allocation of financial resources, and reduce the distortion effect of any intervention
- China should improve coordination among financial regulators.