China needs bailout and capital plans for crisis event: PBOC Advisor

People’s Bank of China adviser Ma Jun has probed the economy for triggers of financial turbulence, and proposed measures including direct bailouts of enterprises and bank recapitalisation should a crisis hit.

Property bubbles, local government contingent debt, the heavy reliance on land sales for financing or the shadow banking sector could set off a major crisis in China, according to Ma’s article published on the Wechat account of PBOC-affiliated magazine China Finance.

He said actions should be taken in advance to prevent risks from materialising, including:

-- “Full attention” to smaller banks, such as joint-stock, city and rural lenders, as their role in generating systemic risks may “very likely exceed expectations”;

-- Revision to the central bank law to enhance the PBOC’s ability to make decisions more independently and giving forward guidance;

-- Allowing more types of financial institutions other than commercial banks to be able to participate in bond trading to improve the liquidity of the market;

-- Invention ranging from direct bailout of enterprises, capital injections of small banks and revision of rules on market trading could be used, according to the article.

Regulators could also benefit from better preparation such as making a list in advance of institutions that may be hit and a workflow of intervention, it said.

Policy makers have increased emphasis on financial stability in recent years, while the macro leverage ratio has stabilised. Risks could still escalate as the economy slows and the trade conflict with the US remains unsolved.

The PBOC has warned that China could face so-called “gray rhino” financial risks -- meaning the economy faces highly probable and high-impact threats that are often been neglected.

Ma’s article is based on results of a recent research project entitled “Early Warning, Contagion and Intervention of Financial Crisis” by Tsinghua University’s PBC School of Finance. The project reviewed Japan’s asset bubble crisis in the 1990s, the 1998 Asian financial crisis, the 2008 global financial crisis, the European debt crisis and China’s A-share rout in 2015.