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China economy

China’s central bank chief lays out plans to avert future financial crisis

Zhou Xiaochuan calls for more equity financing and direct financing

PUBLISHED : Saturday, 04 November, 2017, 4:26pm
UPDATED : Saturday, 04 November, 2017, 7:40pm

China’s central bank chief has set out his strategy to prevent a future financial crisis by calling for broadened equity funding and direct finance to reduce corporate leverage and eliminate “zombie” companies, official media reported on Saturday.

Zhou Xiaochuan, governor of the People’s Bank of China, said the market should play a “decisive role” in allocating financial resources, but also stressed the importance of stronger regulation and 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 pre-emptive measures and reactive solutions”, Zhou wrote in an article aimed at helping the public deepen their understanding of last month’s party 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.

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China has so far avoided a sharp slowdown in its economy, but analysts and global economic bodies such as the International Monetary Fund have warned Beijing that China is over-indebted. Rating agencies estimate the overall debt burden at almost three times annual economic output.

In his article, Zhou said 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.

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The more specific measures 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 China will relax management of its forex market, promote yuan internationalisation and broaden market access by foreign financial institutions.

But in what may been 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.