People’s Bank of China (PBOC) Governor Zhou Xiaochuan (周小川) spelled out his strategy to prevent a future financial crisis, urging broadened equity funding and direct finance to reduce corporate leverage and eliminate “zombie” companies, official media reported yesterday.
China’s central bank boss said that the market should play a “decisive role” in allocating financial resources, but stressed the importance of stronger regulation and Chinese Communist Party leadership in guiding financial reform, according to the Shanghai Securities News.
In warding off systemic financial risks, China should deal with “both cause and symptoms” and be active in “both preemptive measures and reactive solutions,” Zhou wrote in an article aimed at explaining last month’s 19th National Congress report.
During the congress, Zhou, who is widely expected to step down soon, spoke of the risks of a “Minsky moment,” referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.
China has so far avoided a sharp slowdown in its economy, but analysts and global economic bodies such as the IMF warn Beijing that China is over-indebted. International rating agencies estimate the overall debt burden at almost three times China’s annual economic output.
In his article, Zhou said that China should “actively develop equity financing, and steadily increase the proportion of direct finance.”
In direct finance, borrowers borrow funds directly from the financial markets without using intermediaries, potentially reducing risks in the banking system.
The more specific measures that Zhou suggested included reforming China’s equity issuance mechanisms, further developing private equity funding, promoting debt-to-equity swaps, and expanding the bond market.
Meanwhile, Zhou also called for further financial deregulation, saying that China plans to relax management of its forex market, promote yuan internationalization and broaden market access by foreign financial institutions.
However, in what might be seen as a balancing measure to such market-friendly steps, Zhou also stressed the importance of tougher supervision, urging regulators and local governments to crack down on illegal arbitrage, shadow banking, and “illegitimate fundraising” that disrupted market order.
Separately, China is to “strictly” ban property developers and real estate agencies from financing down-payments for home purchases, the state-run Xinhua News Agency reported on Friday, citing the housing ministry.
The government is to step up anti-money laundering efforts in the real estate industry, the report said.
Banks should manage mortgages and consumer loans separately and monitor borrowing through credit cards, it said, warning against Internet companies and microlenders who illegally provide financing.
Shares of developers tumbled a week ago when Caixin reported that officials had stepped up checks connected to down-payment loans.
Investors are weighing developers’ prospects after stratospheric share price gains this year, with China Evergrande Group (恆大地產) shares up 505 percent and Sunac China Holdings Ltd (融創中國控股) gaining 475 percent. The industry is consolidating and the government is trying to rein in home prices.
Additional reporting by Bloomberg
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