PBOC's Zhou: Risk Controls 'Forever Theme' in Financial Sector

     BEIJING (MNI) - Forestalling a systemic crisis in the financial sector is

now a "forever theme" for the government, People's Bank of China governor Zhou

Xiaochuan said in an article on the central bank's website that was published as

an authoritative analysis of President Xi Jinping's report to the 19th Communist

Party Congress last month.

     China should take the initiative to prevent systemic financial risks, which

means speeding up reforms, Zhou said in the article, which was published

Saturday. China's financial status is positive overall, he noted, but added that

it was also a peak time for risks, which can be hidden, complicated, contagious

and hazardous, and can also arise abruptly. 

     The imbalance of the economic structure is severe, illegal practices are

rife and risks are accumulating, making the financial system increasingly

vulnerable, Zhou argued. China's current financial risks are high debt and

uncertain liquidity conditions in the financial sector, possible defaults at

some institutions, as well as cross-market, cross-sector and cross-region shadow

banking and illegal practices, Zhou said.

     Those risks reflect an imbalanced structure in the real economy, the lack

of self-adjustment of the sector in a countercyclical period, the lack of

efficient management in financial companies, the failure to open up the sector

and weaknesses in the supervision system, he argued.

     Regulators have focused too much on developing segments of the financial

sector, while ignoring the importance of risk controls, Zhou said, and the tasks

of local and central financial regulators are unclear, causing some activities

to fall through regulatory cracks.

     The long-serving PBOC head, who is expected to retire soon, said China

needs to advance the reform and opening of financial institutions and the

financial market, which could be attained by enhancing the sector's ability to

serve the real economy. Deepening reform of financial markets would also help,

especially in the bond market, where financing should be expanded along with the

variety of bonds, and rules standardized to meet the needs of companies. 

     Also in need of improvement are trade investment rules, the

internationalization of the yuan and foreign-exchange controls, Zhou said. In

addition, China needs to lower entry restrictions on foreign financial

institutions, and align its regulatory standards with international ones, he

said.

     Echoing Xi's keynote speech to the party congress, Zhou stressed the

importance of coordinating the two-pillar framework of monetary policy and

macroprudential policy. The stability of the currency-exchange rate needs to be

tied to financial stability, he said. 

     Monetary policy will mainly tackle problems in the overall economy to

maintain stable growth and inflation, while macroprudential policy will mainly

aim to reduce systemic financial risks resulting from cyclical fluctuations and

contagion of cross-market risks, Zhou said.

     China also needs to continue to clamp down on overexpansion and illegal

activity with negotiable certificates of deposit, increasing leverage,

off-balance-sheet businesses and arbitrage, among other harmful financial

activities, Zhou argued. 

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: rich.dirks@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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