China’s financial system is getting significantly more vulnerable due to high leverage, according to central bank governor Zhou Xiaochuan, who also flagged the need for deeper reforms in the world’s second-biggest 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 a lengthy article published on the People’s Bank of China’s website late Saturday.
The nation should toughen regulation and let markets serve the real economy better, according to Zhou. The government should also open up financial 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 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.”
Zhou’s comments are the latest in a series of blunt warnings, and signal that policy makers remain committed to a campaign to reduce borrowing levels across the economy. Concern that regulators may intensify the deleveraging drive after the twice-a-decade Communist Party Congress has helped push yields on 10-year government bonds to a three-year high.
Still, measures of credit continue to show expansion, with aggregate financing surging to a six-month high of 1.82 trillion yuan ($360 billion) in September.
China’s corporate debt surged to 159 per cent of the economy in 2016, compared with 104 per cent 10 years ago, while overall borrowing climbed to 260 per cent.
Zhou’s article was included in a book that was published recently to help the public and party members to better comprehend the spirit of the 19th Party Congress, according to the official Xinhua news agency and information on the PBOC’s website.
Among other notable claims in the paper, Zhou said that some high-risk activities are creating market bubbles under the cover of “financial innovation” and he also accused some internet companies that claim to help people access finance of being Ponzi schemes.