The People’s Bank of China (PBC) released the China Financial Stability Report 2021 recently, giving a comprehensive review of the soundness of China’s financial system since 2020. According to the report, since 2020, the external environment has been severe and complex, and the task of advancing reform and development and ensuring stability in China has been arduous and heavy. Notably, the COVID-19 pandemic has taken an unprecedented toll on the global economy, triggering the worst economic recession worldwide since the World War II. Confronted with formidable tests and challenges, China has continued to pursue high-quality development, coordinated the pandemic containment with economic and social development, successfully concluded the 13th Five-Year Plan, secured a complete victory in the battle against poverty, and accomplished the building of a moderately prosperous society in all respects. In 2020, with its GDP growing by 2.3 percent year on year and the economic output exceeding RMB100 trillion, China became the only major economy with positive growth in the world.
As pointed out in the report, following the decisions and arrangements of the Central Committee of the Communist Party of China (CPC) and the State Council and under the coordinated command of the Financial Stability and Development Committee (FSDC) under the State Council, the financial system has remained committed to serving the real economy, extended all-out support to stabilizing businesses and securing employment, further deepened financial reform and opening-up, and fought the tough battle of forestalling and defusing major financial risks. With these efforts, significant achievements have been made. First, the overly rapid growth of the macro leverage ratio has been effectively curbed. From 2017 to 2019, the macro leverage ratio basically stabilized at around 250 percent, leaving ample room for the PBC to strengthen countercyclical adjustments to offset the impact of the pandemic. In 2020, affected by the pandemic, China experienced a slow-down in its nominal GDP growth and took more intensive macro countermeasures. As a result, the macro leverage ratio increased temporarily, but it is expected to gradually return to a stable level. Second, problems related to high-risk institutions have been addressed in an orderly manner. By decisively taking over Baoshang Bank (BSB) according to relevant laws, the regulatory authorities have resolutely broken rigid payments and tightened market disciplines while protecting the legitimate rights and interests of BSB’s depositors and clients to the greatest extent possible. The financial restructuring and the capital and equity expansion of Bank of Jinzhou have been completed, and the bank resumed its normal operation. Nine financial institutions affiliated with Tomorrow Holding Co. Ltd. were taken over, with no interruption to their basic financial services, and the work on asset and capital verification and restructuring has been going on smoothly. Risk resolution of CEFC China Energy Co., Ltd. has been basically completed, and that of Anbang Group has entered the final phase. Third, shadow banking risks have continued to decline. Regulatory authorities have unified the regulatory standards on asset management businesses, reasonably determined and adjusted the transition period of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions, and made significant improvement in guiding financial resources to flow back into the real economy and preventing funds from circulating solely within the financial system. Fourth, credit risks in major fields have been appropriately resolved. The surveillance over bond issuance and trading activities has been strengthened, and a mix of policies have been implemented to defuse debt risks of enterprises. Contingency plans have been put in place to tackle the potential increase of non-performing loans (NPLs), and banks, especially small and medium-sized banks, were supported in replenishing capital through multiple channels. Fifth, problems disrupting financial orders have been rectified. Peer-to-peer (P2P) Internet-based lending institutions in operation were shut down, and illegal financial activities such as illegal fund-raising, cross-border gambling, and underground banking, were effectively contained. Moreover, solid progress has been made in defusing risks related to trading venues of private equity funds and other financial assets, and regulation over large Fintech companies has been strengthened. Six, progress has been made in system building for preventing and resolving financial risks. The PBC has set up a countercyclical capital buffer mechanism, rolled out measures for evaluating systemically important banks (SIBs) and for regulating financial holding companies, and coordinated regulation of financial infrastructures. Improvement has been made in system building and institutional arrangements for the deposit insurance system, giving play to the role of deposit insurance as a platform for early correction and risk resolution. Rules have been formulated for fund monitoring and financing regulations of key real estate enterprises, and the real estate loan concentration management system has been launched. Overall, as a result of proper governance, financial risks have contracted and remained under control, and the financial sector has registered steady and sound development, cultivating a sound financial environment for China to effectively offset the impact of the COVID-19 pandemic and build a moderately prosperous society in all respects.
According to the report, as the COVID-19 pandemic broke out amid changes unseen in a century, the world is undergoing huge turbulence and transformation, and instability and uncertainties surged both at home and abroad. Internationally, the outbreak of the pandemic in 2020 has accelerated massive changes around the world. The global economy is languish. The global industry chain and supply chain are frustrated by non-economic factors. International trade and investment shrink dramatically. The spillovers of loose monetary policies in developed economies persist. Economic globalization faces headwinds. Protectionism and unilateralism are on the rise. The patterns of international economy, science and technology, culture, security and politics are all undergoing profound adjustments. Domestically, China still faces great pressure of imported COVID-19 cases. China’s economic recovery is unbalanced and weak-based. Moreover, a variety of financial risks are spreading over a wide range. Potential regional financial risks remain in the economy, the debt default risk of some enterprises are exacerbating, and several small and medium-sized banks are facing prominent risks. These facts call for more efforts to safeguard financial stability.
Looking ahead, China’s economy will improve in the long term with a broad market space and strong resilience, and these fundamental characteristics will remain unchanged. A new development paradigm with domestic circulation as the mainstay and domestic and international circulations reinforcing each other is taking shape. The year 2021 marks both the start of the 14th Five-Year Plan period and the centenary of the founding of the CPC. It is crucial to ensure sound economic and social development as the first step towards China’s development goals during the 14th Five-Year Plan period. To that end, it is essential to have critical thinking about domestic and external environment and achieve national rejuvenation in the context of global changes unseen in a century. In the meantime, it is necessary to gain insights into new features and requirements brought by changes in China’s major social problems, to have an in-depth understanding of new challenges brought by the intricate international environment, and to have a stronger awareness of opportunities and risks. While continuing to coordinate regular pandemic containment efforts with economic and social development, the PBC will maintain the consistency, stability and sustainability of macro financial policies and implement the sound monetary policy in a flexible, targeted and appropriate manner. With these efforts, the PBC will be able to invigorate micro entities, render vigorous support to inclusive micro and small businesses (MSBs), rural revitalization, the manufacturing sector, science and technology innovation as well as the transition to a green economy, enhance financial services for the real economy, and promote the stable and sound development of the economy. In addition, it is critical to properly handle the relationship among financial development, stability and security. To that end, the PBC will work to improve the financial risk prevention, early warning, resolution and accountability systems, urge small and medium-sized financial institutions to defuse risks through reforms, focus on lowering credit risks, maintain the stability of stock, bond and foreign exchange markets, and strictly guard against the shocks of external risks. Furthermore, the PBC will deepen the reform and opening-up. Specifically, it will further promote the market-based reform of interest rates and the RMB exchange rate, steadily advance the capital market reform, and push forward high-quality development of the bond market. The PBC will deepen the reform of financial institutions, urging them to return to their original vision and focus on their main businesses. While effectively guarding against risks, the PBC will continue to expand the financial opening-up at a high level.
