World Economy

China Fighting Systemic Risks

Beijing business and banking regulators have begun to crackdown on the Gray Rhinos and other overextended firms. The Xi government’s new attitude reflects a desire to keep money at home under state control and support the value of the yuan
Controls on riskier types of financing have pushed up short-term borrowing costs.Controls on riskier types of financing have pushed up short-term borrowing costs.

A senior Chinese economic official on Thursday indicated that policymakers would be willing to sacrifice some short-term economic growth in order to deal with systemic risks.

Beijing is trying to contain rising debt and defuse property bubbles amid fears such risks could derail the world's second-largest economy if not handled well, but policymakers will be treading warily ahead of a key party meeting later this year, Reuters reported.

"China can't let smaller risks eventually lead to large systemic risks that would cause serious harm to China's economy," Yang Weimin, vice minister of Office of the Central Leading Group on Financial and Economic Affairs, told reporters.

"We would rather sacrifice in some other areas, but also deal with the relationship between stable growth and risk prevention", Yang said. But Yang also said China could achieve both goals of maintaining steady growth while containing debt levels.

China's total private and public debt has exceeded 250% of GDP, up from 150% before the global financial crisis, according to the Organization for Economic Cooperation and Development.

Chinese regulators have already launched a crackdown on riskier types of financing, but the drive has pushed up short-term borrowing costs. The government's efforts to lower debt levels in the economy will be a long-term process and the key is to push state-owned firms to deleverage, Yang said. "We cannot allow the leverage ratio to continue to rise in order to safeguard economic growth," he said.

Crackdown on Forex Irregularities

China will maintain a crack down on foreign exchange irregularities to ensure stability in the currency market and the broader economy, the country's forex regulator said on Friday, in a sign Beijing will continue to keep a tight leash on capital outflows, zeebiz reported.

Authorities will "severely crack down on underground banks and other foreign exchange violations to prevent and resolve risks from cross-border capital flows", the State Administration of Foreign Exchange said, after an internal meeting.

The move will keep foreign exchange market stable and ensure the national financial stability and economic safety, it said.

Over the past few months Chinese authorities have tightened controls on capital outflows in a bid to support the yuan and protect the country's foreign exchange reserves. And there is little sign Beijing will relax the restrictions despite the yuan's recent rebound.

Policy stimulus has stabilized the economy, but leverage and financial risks have raised concerns about the outlook, and analysts say the authorities will be keen to avoid instability ahead of a key leadership transition in the autumn.

Checking Gray Rhinos

Despite persistent fear about bubbles bursting, China's economy continues to grow. Still, even the Xi government appears to realize that the good times might not go on forever. President Xi Jinping recently emphasized the importance of financial stability, calling it a matter of national security.

China's "Gray Rhinos," large conglomerates with global reach, long prospered on state credit. In recent years companies such as Wanda, Anbang, HNA Group and Fosun have engaged in an orgy of high-priced foreign acquisitions, mostly financed by Chinese state-controlled banks.

However, Beijing business and banking regulators have begun to crack down on the Gray Rhinos and other overextended firms. The Xi government's new attitude also reflects a desire to keep money at home under state control and support the value of the yuan.

Instead, the People's Republic of China should reform policies to attract more foreign investment. Although China doesn't need foreign funds as much as before, given the availability of domestic capital, more money invested from whatever source continues to benefit the Chinese economy. Especially useful would be more cash coming in at a time when the government was concerned about too much money going out.

China's economy grew a faster-than-expected 6.9% in the second quarter, matching the first quarter's pace, supported by solid exports, industrial production and consumption. But analysts expect growth to slow in the second half as the property sector cools and borrowing costs for firms climb.

Chinese leaders have pledged to keep the economy steady as they prepare for a five-yearly transition later this year. Government officials have said steady growth in the first half could help hit the full-year target of around 6.5% and achieve even better results.


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