In an article published in '19th Party Congress Complimentary Report', Zhou Xiaochuan 周小川 People's Bank of China governor provided his take on China's financial system and urged that problems be addressed at their roots.
At the macro level, high financial leverage and liquidity risk are building up. By end 2016, the country's financial leverage—the ratio of total debt to GDP—reached 247 percent, in the business sector reaching 165 percent, exceeding the international average. SOEs and local governments are piling up debt, adds Zhou. In addition, the 2015 stock market turmoil and housing bubbles in some cities were significant contributors to excessive leverage being channeled into those markets.
At the micro level, financial institutions are facing mounting credit risk, as nonperforming loans pile up and eat into the banking sector capital buffer and defaults occur more often in the bond market. Finally, rampant expansion of shadow banking, plagued by multi-layered structuring of wealth management products, maturity mismatches between assets and liabilities, and implicit return guarantees is exacerbating cross-market and cross-region risk. Financial conglomerates and non-financial firms keen on investing in the financial industry are trying to make quick money through insider trading and affiliated-party trading.
Ineffective monetary intervention, coupled with financial regulatory fragmentation, has facilitated the buildup of risk, says Zhou. Monetary policy has been hijacked—greater money supply is called for both in good times, when money is sought to accommodate booming economic activity, and in bad times, when it's needed to pay off debts and spur growth. Regulatory fragmentation also results in redundant financial products of similar nature issued by different financial institutions in different regulatory standards.