The growing risks in China’s financial sector have long been a hot topic on Wall Street, but until recently, the country’s policymakers have been willing to overlook these risks as growth has blossomed. Now, however, it looks as if the region’s lawmakers are finally starting to take action to stabilize the financial sector.
In a research note published this week, HSBC points out that the first step policymakers have taken to reduce growing financial risks is to convene the Central Politburo on 25 April for the first time in a decade, to study how China could better protect its financial system and prevent financial contagion. President Xi Jinping headed the meeting and stressed safeguarding financial security as “a strategic and fundamental matter for China’s social and economic development”.
China’s Financial Sector and WMPs
Talk about financial regulation is one thing, but actually acting on these conversations is another thing altogether. It seems China is not just all talk and the country is taking steps to stabilize its financial system. According to HSBC China economists Qu Hongbin and Julia Wang, since the beginning of 2017, the PBoC has signaled a renewed focus on financial de-leveraging, by combining tighter liquidity balance in the interbank market and changes made to the new regulatory framework
What’s more, the PBoC has essentially embarked on a monetary policy tightening program by hiking repo lending rate removing a total of RMB925 billion short-term liquidity from the market through a series of repos.
In contrast, during the past 11 quarters, the bank has injected money into the economy. Tighter monitoring of credit expansion has also been introduced. HSBC’s analysts note that during the first quarter the central bank included off-balance-sheet wealth management products in its measurement of broad credit growth for the first time, shining a light into the gloomy and opaque wealth management products sector.
As well as the actions by the central bank to tighten monetary policy and get a better understanding of credit creation, HSBC notes that there is also a movement to improve regulation of China’s financial sector. According to press reports the PBoC has released a draft of Guiding Opinions on Asset Management Business Regulation of Financial Institutions for review and comment by other financial regulators and government agencies, including the CBRC, CSRC, and CIRC.
The paper apparently aims to curb the risks in the country’s booming asset management industry by addressing such issues such as capital adequacy, introducing a unified standard for qualified investors, imposing qualification requirements on asset management products and introducing independent custody of assets.
Under the draft rules, it would be a violation to promise a guaranteed return on asset management products, which has been common practice for many wealth management products in China. The paper is still being finalized, but it’s clear policymakers are set on making China’s financial sector a more stable and secure environment.
What are the long term implications of this? Broadly positive according to HSBC:
“The impact on broader liquidity could be more significant, as seen in higher interbank yields. Moreover, negative sentiment could last for a while, especially as the government continues to root out financial corruption. Yet, in the long run, less malpractice and excessive risk would bode well for the development of China’s financial sector and productive sectors in the real economy.”