While we await the PBOC CNY mid rate .... comments on China from Commerzbank

PBoC's governor Zhou Xiaochuan posted an eye-catching article on PBoC's website.

This might be the first publication by Mr Zhou comprehensively discussing China's debt and leverage issues, which is also training material for senior Party members after the National Party Congress.

In this article, Mr Zhou mentioned three levels of financial risks:

  • high lever- age ratios and related liquidity risks,
  • rising credit risks faced by financial institutions,
  • and shadow banking activities across different financial sectors.

In addition, there are two causes of these financial risks:

  • First, the economic departments tend to take on more risks during boom periods, and promise "bailouts" when under stress scenarios;
  • Second, corporate governance and capital management are ignored especially in state-owned financial institutions.

Against this background Mr Zhou calls for co-operation of financial regulators, strengthening the capital management among financial institutions, reducing financial arbitrage, and identifying the risks embedded in shadow banking.

In my opinion, Mr Zhou's article indicates that the Chinese authorities will take more serious measures to address the debt issues in the future, implying that the "bubble deflating" will remain the policy priority. Of particular noting, Mr Zhou is likely to retire in coming months.