China CB Governor Says Economy on Brink of Collapse

Zhou Xiaochuan, the governor of China’s central bank, the People’s Bank of China, has now warned that the Chinese economy is on the verge of collapse.

In an article published on the website of PBOC, Zhou said that China’s economy is currently very vulnerable due to the large amounts of borrowed capital.

He explained that the Chinese economy faces a huge risk from three factors, which are high-leveraging ratio and liquidity in macro-finance, the credit risk in micro-finance, and cross-market and cross-regional shadow banking along with financial crime, reported IBTimes reported.

Speaking of these risks Zhou said that they are “hidden, complex, sudden, contagious and hazardous,” according to Express UK. “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.”

Zhou also discussed the steps China can take to prevent the collapse and said thorough reforms were necessary. He also explained that one of the biggest reasons that China’s economy was having a hard time was due to “zombie” companies, which need to be shut down.

 Corporate Debt

China’s corporate debt is said to be extremely high at 165% in 2016, a figure that is much higher than the usual rate. “Financial risks include basic risks associated with financial markets and financial institutions. For example, some unhealthy financial institutions fail to meet relevant standards, and as a result, may have to be closed or go bankrupt,” Zhou said.

“By comparison, systemic financial risks can lead to financial crisis, set off dramatic chain reactions in the market, and cause great shocks to the economy and employment,” he added.

Beijing is serious about reducing corporate debt and establishing new asset-management companies for that purpose. Authorities want the firms to have a wide range of financing options open to them, from bond issues to private placements and perhaps even tapping interbank liquidity.

Although China’s capital markets are getting deeper by the day, more external expertise wouldn’t go amiss. So far, only about 10% of the announced 1 trillion yuan ($151 billion) of debt-swap deals have been funded, in part because private-sector investors aren’t interested.

That’s where foreign financial institutions should be turning their attention. There’s business here for the taking.

Zhou also blamed China’s excessive urbanization and said that the country’s fiscal policy is not transparent enough. “So in the financial market, there is distortion in the pricing of the local government bonds and the lending to financing platforms of the local governments,” he noted. Due to this distortion, the financial sector of the country tends to underestimate the risk.

 Easing Curbs

China took what it called a major step toward opening its financial industry with a promise Friday to ease limits on foreign ownership of banks and securities firms following a visit by US President Donald Trump that was dominated by trade issues, AP reported.

The announcement by a cabinet official appeared to respond to mounting US and European complaints that Beijing hampers foreign activity in a variety of industries in violation of free-trade commitments. The American Chamber of Commerce in China, which has appealed to Beijing to ease market barriers, said it looked forward to seeing details of the latest changes.

The announcement followed a series of multibillion-dollar contract signings with American companies during Trump’s visit in a tradition aimed at blunting criticism of Beijing’s trade surpluses and market barriers.

China will lift its limit on foreign ownership of securities, fund management and futures companies from a minority stake of 49% to a majority stake of 51% and end restrictions after three years, the official, Zhu Guangyao, said at a news briefing. He said a similar change would be made for life insurance companies and those would end in five years.

Regulators also will abolish restrictions that limit a single foreign investor’s stake in a Chinese bank to 20% and cap total foreign ownership of any institution at 25%, Zhu said.

“In other words, foreign owners can have full ownership of such companies” after three to five years, he said. “This opening up is decisive and the effect will be far-reaching.”

Beijing will also gradually reduce tariffs on automotive imports, Zhu said, without providing details.