China’s financial system is becoming significantly more vulnerable due to high leverage, said central bank governor Zhou Xiaochuan (周小川), who has made a series of blunt warnings about debt levels in the world’s second-largest economy.
Latent risks are accumulating, including some that are “hidden, complex, sudden, contagious and hazardous,” even as the overall health of the financial system remains good, Zhou wrote in an article published on the People’s Bank of China’s Web site late on Saturday.
The nation should toughen regulation and let markets serve the real economy better, Zhou said, adding that the government should also open up markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate in China.
“High leverage is the ultimate origin of macro financial vulnerability,” said Zhou, 69, who is widely expected to retire soon after a record 15-year tenure. “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.”
The latest in a string of pro-deleveraging rhetoric from the central bank, Zhou’s comments were speculated to have contributed to a rout in Hong Kong shares. They signal that policymakers remain committed to the campaign to reduce borrowing levels across China’s economy.
Concern that regulators might intensify this drive after the Chinese Communist Party’s 19th National Congress last month helped push yields on 10-year sovereign bonds to a three-year high.
Chinese bonds seemed to shrug off the essay early yesterday, with 10-year yields down one basis point to 3.88 percent as of 11:14am in Shanghai, while the cost on five-year notes rose one basis point to 3.95 percent.
Hong Kong’s Hang Seng Index slumped the most in two weeks and the Shanghai Composite Index fell for a third day in a row.
“Investors are very sensitive to any negative news since the market is at a high level,” KGI Asia Ltd executive director Ben Kwong said, referring to the equity move. “Zhou’s comment about financial risks is hurting sentiment.”
Zhou’s essay reads more like an explanation of existing priorities than a sign they are changing direction or pace, Bloomberg Intelligence economists Tom Orlik and Fielding Chen said.
China might shift slightly toward a tighter stance, but macro-prudential rather than monetary policy will do the leg work to limit financial risks, they wrote in a note.
Despite the tough rhetoric around deleveraging in China, measures of credit continue to show expansion, with aggregate financing surging to a six-month high of 1.82 trillion yuan (US$274 billion) in September.
Corporate debt last year surged to 159 percent of the economy, compared with 104 percent 10 years ago, while overall borrowing climbed to 260 percent.
Zhou’s article was included in a book that was published to help the public and party members better comprehend the spirit of the party congress, according to the official Xinhua news agency and information on the central bank’s Web site.
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