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     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
[TOPICS: M$A$$$,M$Q$$$,MC$$$$,MT$$$$]

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