After another year of rapid credit growth, continued capital outflows and a series of damaging boom-bust cycles in asset markets in the past, Chinese regulators are expected to announce a series of landmark reforms to fend off systematic risks in the country’s financial system within the year.
According to the Chinese Global Times newspaper, a state-backed media outlet, expectations for reforms have accelerated this week as rumors of potential guidelines floated around domestic financial websites.
The guidelines were mainly aimed at creating a uniform regulatory system by combining existing regulations for different financial markets and tackling issues such as high leverage, the paper said, noting that they were issued jointly by the four main financial regulatory agencies in China: The People’s Bank of China (PBOC), the China Securities Regulatory Committee (CSRC), the China Banking Regulatory Committee (CBRC) and the China Insurance Regulatory Committee.
The paper says the reforms will likely focus on improving coordination among these agencies and enforcement of financial laws to protect investors’ interests, coming in response to the stock market carnage witnessed in 2015 along with large, and continued, capital outflows since the PBOC stunned markets in August 2015 when it announced a change to the rate-setting mechanism for the Chinese yuan daily trading mid-point, resulting in an instant 2% depreciation against the US dollar.
To Cheng Shi, head of ICBC International Research, the repeated statements and measures coming out of the regulatory agencies recently signals the likelihood that significant reforms are highly likely to arrive this year.
“2017 could be a year with landmark financial reforms,” he told the Global Times.
Cheng said past events made it clear that loopholes currently exist within the regulatory framework of the nation’s financial system, noting that exist mainly because the agencies are not closely coordinated.
“A single set of policies by a single agency does not have a complete impact on the market, that just doesn’t work in China,” Cheng said.
While only speculation that reforms are coming at this stage, the news will no doubt be welcomed by anyone concerned about the haphazard response to past financial market turmoil from regulators, seemingly adopting a reactive, rather than proactive, form of managing risks.
That was all too well documented in mid-2015 when regulators became increasingly frantic in their attempts to stymie a plunge in Chinese stocks that followed an equally large margin-fueled rally that was in encouraged by the government through the nation’s state-run media.
Banning major shareholders from selling down their stakes, limiting futures trading, arresting malicious short-sellers and forcing state-backed investment vehicles to buy into the selloff, among other measures, were rolled out in attempt to limit the scale of the selloff.
Even with all of that support, it still took stocks more than six months for the market to bottom, and still continues to languish at levels well below those lofty levels seen in mid-2015.
After that response, it’s little wonder that some have been concerned about the credit-fueled recovery in China’s property market last year, a factor that helped to bolster flagging economic activity that caused not only Chinese but global financial markets to panic at the start of 2016.
Should a similar scenario to what what happened in stocks eventuate in the housing market, the economic damage would be significantly larger in scale, and would be felt around the world.
Chinese policymakers have taken steps to take heat out of the property market in recent months, rolling out tighter buying restrictions in more than 20 major cities to cool price growth.
While that has worked, seeing monthly gains decelerate in each of the past four months, prices across the nation still rose by more than 12% in the year to January, with some major cities recording rates of more than 20%.
That was partially fueled by a noticeable pickup in credit growth over the same period.
According to calculations from Bloomberg, total social financing — the broadest measure of credit growth within China — came in at $US1.8 trillion in 2016, equivalent to the size of Italian GDP.
And that’s made more than a few people nervous, particularly with the nation’s debt-to-GDP ratio — currently around 280% — continuing to ratchet higher, indicating that credit continues to grow faster than the economy
“Beijing continues to say deleveraging, but time and time again its own numbers simply do not match what they’re trying to sell,” Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, told Bloomberg. “There’s a reason there are increasing levels of worry and risk within the Chinese economy.”
That’s something that’s also caught the attention of the Reserve Bank of Australia, too.
“The growth target was achieved last year partly through a further build-up in debt especially to finance infrastructure investment and property development,” said RBA governor Philip Lowe in his opening remarks to the House of Representative Standing Committee on Economics earlier today.
“This strategy was clearly helpful in the short run and it supported commodity prices, and Australia has benefited from that. But it runs counter to the Chinese authorities’ goal of addressing the high levels of debt and getting domestic finances on a more stable footing.”
Lowe, in just one sentence, summed up what many China watchers are thinking at present.
“We can’t be sure about the longer-run implications,” he said.