China think tank warns of potential ‘financial panic’ in leaked note

A leaked report from a Chinese government-backed think tank has warned of a potential “financial panic” in the world’s second-largest economy, a sign that some members of the nation’s policy elite are growing concerned as market turbulence and trade tensions increase.

Bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising US interest rates and a trade spat with Washington, according to a study by the National Institution for Finance & Development (NIFD) which was seen by Bloomberg News and confirmed by a NIFD official.

The think tank warned that leveraged purchases of shares have reached levels last seen in 2015 – when the stock market fell by a third, wiping US$5 trillion off the value of Chinese equities.

“We think China is currently very likely to see a financial panic,” NIFD said in the study, which appeared briefly on the internet on Monday, before being removed. “Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.”

The study provides another indicator that China is growing concerned about the knock-on effects on its economy of trade tensions with the US In recent weeks, prominent academics have begun to question if the country’s slowing, trade-dependent economy can withstand a sustained dispute, which has already started to weigh on stock prices and the yuan.

China should stand ready to roll out a mix of fiscal and financial-sector measures in the event of a systemic crisis, according to NIFD, which was established in 2005 as a national-level think tank backed by the Chinese Academy of Social Sciences. Authorities should be ready to step in with full financial support if a major default roils markets, rather than taking piecemeal steps, NIFD said.