What’s a ‘black swan’ and when will it strike next? China’s not taking any chances

There was a financial crisis in Southeast Asia in 1997, another in the United States in 2007, so if a crisis comes this year where will it happen? This was the question posed during a speech last month by Yang Weimin, the deputy director of a finance and economics office serving President Xi Jinping. “It certainly won’t happen at the South Pole or the North Pole,” Yang quipped. “Only penguins live at the South Pole, but Black Swans live among us,” he said, referring to the term for unexpected events that can have far-reaching consequences on politics and the markets. Yang’s warning came as China has launched a sweeping campaign to rein in risks deemed to pose a threat to the nation’s economy. Xi Jinping joins calls for more control of financial risks After the plunge in share prices during a stock market rout two years ago, plus the shock caused by Britain’s decision to leave the EU and the election of US President Donald Trump, the Chinese leadership is trying to avoid surprises in the coming months by whipping up the whole state apparatus to root out sources of instability ahead of a major Communist Party reshuffle in the autumn. “The political process is going to be very important this year in terms of determining policies,” said Mark Zandi, chief economist at Moody’s Analytics. “There’s going to be a significant effort to ensure that this is a year of stability.” Qiu Xiaohua, a former head of China’s National Bureau of Statistics, agreed during a forum last week that politics were likely to play a much more prominent role in China’s economy in the coming months. “The top-down administrative system will play a more active role in the Chinese economy with the start of the new political cycle. It’s a unique China thing,” said Qiu. President Xi said at a key decisionmaking meeting on February 28 that China must “prevent and control financial risks” and improve regulation to keep systemic risks at bay, sending a message that economics experiments and deregulation were now out of favour. The heads of China’s three financial watchdogs, Liu Shiyu at the China Securities Regulatory Commission, Xiang Junbo at the China Insurance Regulatory Commission and Guo Shuqing at the China Banking Regulatory Commission, held press conferences over the past weeks pledging strict regulation and vowing to crackdown on “irregularities”. The People’s Bank of China is also leading a group of ministries to draft regulations to oversee the country’s sprawling shadow banking sector and crack down on illegal profiteering and those taking advantage of legal loopholes. “Financial regulation is likely to be tightened to contain financial risks,” Ding Shuang, the chief China economist for Standard Chartered in Hong Kong, wrote in a research note. Ding cited the examples of Beijing’s crackdown on excessive borrowing in the bond market, tightened supervision of wealth management products and severe punishment of insurers for aggressive takeover bids in the stock market. Shenzhen tycoon Yao Zhenhua barred from insurance industry for 10 years Yao Zhenhua, a Chinese tycoon, was barred from the insurance industry for 10 years last month after he caused a stir in China’s bourses by launching a hostile bid for control of a leading property developer Local governments, aided by debt relief efforts from Beijing and strong credit, are trying to start a new round of investment to bolster growth. Newly-appointed provincial or municipal governors are particularly zealous to boost investment. However, government efforts to curb financial risks may come at a price, according to Shen Jianguang, chief economist at Mizuho Securities Asia. “China will certainly prioritise economic stabilisation ahead of the party congress, but what I’m worrying about is whether the current investment is too high and whether it’s necessary. The current economic rebound could lose its steam in the second quarter,” said Shen. China’s policymakers face a difficult problem.... how to rein in credit growth while keeping the economy humming along Twenty-three Chinese provinces have planned a total of 45 trillion yuan (US$6.5 trillion) in fixed asset investment this year, a number that has fanned speculation over whether local Chinese governments were quietly reverting to the traditional model of state stimulus measures to produce growth. Li Pumin, a spokesman for the National Development and Reform Commission, said at a press conference the fixed-asset investment plans were necessary to spur growth. However, despite Beijing’s efforts to avoid black swan incidents there will inevitably be risks beyond Beijing’s control. These most notably include Trump administration trade policies, with the threat of tariffs against Chinese imports into the US, and the value of the dollar against China’s currency. “The biggest uncertainty for China’s economy in 2017 comes from the US, both from the dollar and the new president,” Larry Hu, chief Greater China economist at Macquarie Group in Hong Kong, wrote in a research note.