The International Monetary Fund held an online press conference and released the latest report on China’s Financial Stability Assessment (FSSA). The report confirms the role of China’s financial system in promoting rapid economic growth and various regulatory measures in China, but at the same time reminds them of the rapid increase in size and complexity. With regard to China’s tremendous concern about the inclusive finance recently, the IMF hopes that China will guard against systematic risks arising from such problems as the over-rapid development and the imperfection of supervision.
The report pointed out that at present China’s financial system is already one of the largest financial systems in the world. The proportion of financial assets in GDP increased from 263% to over 467% in 2016. However, special attention needs to be paid to the tensions and potential risks in the following three areas:
First, monetary and fiscal policies aimed at supporting employment and growth have been expansive in recent years, causing substantial credit expansion, resulting in an increase in corporate and resident sector debt. The report shows that at present, the ratio of credit to GDP has increased by 25% on the basis of its long-term trend, which is high from an international standpoint. Corporate debt to GDP ratio reached 165%, although residents’ debt is still low, but its GDP to GDP ratio over the past 5 years increased by 15 percentage points.
This point has been repeatedly mentioned in IMF’s report released in the past. In the IMF’s Global Financial Stability Report released in October this year, it pointed out that the ratio of assets and GDP in China’s banking sector has risen from 240% at the end of 2012 to the present 310%, and hope China will continue its in-depth reform.
Second, the demand for high-yielding investment products and the strengthening of regulatory oversight in the banking sector have led to the emergence of regulatory arbitrage and the ever-increasing investment in sophisticated investment channels. As a result, high-risk loans have shifted from banks to less well-regulated financial systems. Investment products from non-bank financial institutions, including asset management companies and insurance companies, have risen sharply, even faster than the banking sector. In this highly interconnected indirect lending system, banks continue to be at the center of the spectrum, and the uncertain relationship among many agencies poses challenges to regulation.
Third, widespread implicit guarantees exacerbate these risks. Financial institutions do not want to let retail investors bear the loss; people have the expectation that the government will provide guarantees for debt issued by state-owned enterprises and local government-financed platforms; and when the stock and bond markets fluctuate, the authorities take measures to stabilize the market All kinds of financial institutions have protection funds. All of these factors lead to moral hazard and excessive risk taking.
In response to the above risks, the IMF’s main recommendations include:
• Reducing over-credit expansion and debt accumulation require over-forecasting of GDP growth due to weakening of national plans as this will stimulate high-growth targets at the local level.
· Strengthen supervision over financial conglomerates and enhance forward-looking comprehensive risk analysis.
· Carefully planning for change can reduce the risk of moral hazard and implicit guarantees.
With the recent upsurge in the listing of Chinese internet finance companies in the United States, the IMF has also paid attention to the rapid development of China’s financial science and technology in recent years. The report shows that: China is the center of global financial science and technology and the authorities have started to regulate it. In 2016, while P2P loans only accounted for about 0.5% of the banking sector assets, its size doubled.
The IMF affirmed that China has made significant progress in inclusive finance and that its use of account penetration, savings and payment services has reached a high level. The remaining challenges include providing services to individuals who are already bank clients but still enjoying inadequate services And micro and small enterprises to provide a wider range of financial services, especially credit and insurance products. At the same time, there is also a need to further increase the spread of financial literacy, especially in rural areas, where investors are more likely to be misled by high-risk or deceptively high returns.
However, the backside of inclusive finance is a lot of risks to every emerging field. For example, the recent IMF credit crunch triggered a huge controversy in China. The IMF also analyzed the following: Financial technology companies make use of investment vehicles for consumers without bank accounts, Loans for cashless and brokered payment systems and loans to individuals and small and micro enterprises that can not obtain loans from the banking system due to lack of credit records all add to the risk and pose regulatory challenges; under the supervision of financial technology companies Money market funds are huge and growing rapidly, which means there may eventually be systemic risks.
The IMF expects regulators to improve the regulatory and regulatory framework for financial technology, improve legal clarity and guide risk management in order to achieve a healthy industry growth that balances innovation with safety and robustness.