PBOC's Zhou Unveils Main Targets of New Regulatory Commission

--Says China To Continue Deleveraging

--Local Government Debt Risks To Be Addressed

--Sees 7% GDP Growth in 2nd Half

     BEIJING (MNI) - The Financial Stability and Development Commission, the

newly created body run by the State Council that will be responsible for

coordinating China's financial regulations, will have four main tasks, according

to People's Bank of China Governor Zhou Xiaochuan.

     The FSDC will focus on regulating internet finance firms, the shadow

banking sector, asset management companies, and financial holding companies,

Zhou said on Sunday during a panel discussion at a Group of 30 seminar in

Washington held in conjunction with the International Monetary Fund and World

Bank annual meetings.

     The People's Bank of China, as the FSDC's "office," will also take the lead

in implementing and narrowing financial regulation, Zhou said.

     "The regulation of the asset management sector is complicated, as the

relevant rules differ under three separate regulators, so the FSDC will simplify

the regulatory process," Zhou said, referring to the China Banking Regulatory

Commission (CBRC), the China Securities Regulatory Commission (CSRC) and the

China Insurance Regulatory Commission (CIRC).

     Zhou affirmed that progress had been made over the past two years in

curbing the shadow banking sector, and he stressed that some shadow banking

businesses had been included in the balance sheets of commercial banks.

     According to the latest data from the CBRC, the number of special purpose

vehicles, one of the main sources of China's high leverage and speculative

investments, decreased 47 percentage points as of the end of September compared

with the January-September period of 2016, and the volume of outstanding entrust

loans had decreased CNY827.9 billion.

     "The overall leverage ratio is declining, although at a moderate pace, but

the [positive] trend has formed," Zhou noted.

     However, Zhou warned that China needs to continue its deleveraging

campaign, considering that the debt-to-GDP ratio is expanding at a fast pace due

to rising corporate debt. Zhou attributed the high corporate debt to booming

local government debt, which he said still needs addressing.

     Zhou admitted that risks related to local government debt had been

underestimated because the pricing system for local government bonds and loan

rates for local government funding vehicles had been distorted due to

insufficient transparency of the fiscal system. 

     Zhou reiterated the importance of eliminating overcapacity in traditional

industrial sectors, despite ongoing infrastructure growth and rapid

urbanization.

     "Urbanization is moving forward rapidly, so the demand for steel and cement

will still be great," Zhou said, adding that China had voluntarily cut 10% of

its production capacity in the steel and cement sectors.

     Zhou also expressed optimism on China's economy, saying he expected GDP

growth to reach 7% in the second half of this year on the continued strength of

household consumption and rapid growth in the services sector. China saw 6.9%

GDP growth in the first half of the year. 

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

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

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