Zhou Xiaochuan, the governor of China’s central bank – the People’s Bank of China (PBOC), has warned that China’s financial system is becoming more vulnerable due to high levels of leverage, or borrowing.
Zhou, in an article published on the People’s Bank of China’s website, has warned about the prospect of potential financial problems in the world’s second-biggest economy.
He argued that deepened reform and opening up are the key measures to proactively control such risks in China’s financial sector.
The central bank governor called for eliminating “zombie” companies to avoid a financial crisis.
Zhou warned that risks of damage to the financial markets in China are “hidden, complex, sudden, contagious and hazardous”.
“In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly,” Zhou said.
Zhou elaborated on the top three financial risks China is faced with: the high-leveraging ratio and liquidity in macro-finance; the credit risk in micro-finance; and cross-market and cross-regional shadow banking together with financial crime.
Zhou, who is expected to retire after a record 15 years, noted that China’s total debt-to-GDP ratio had surged to 247 percent in 2016, while it was 165 percent for corporate debt, higher than the internationally accepted risk level.
“Financial risks include basic risks associated with financial markets and financial institutions. For example, some unhealthy financial institutions fail to meet relevant standards, and as a result may have to be closed or go bankrupt,” he said.
“By comparison, systemic financial risks can lead to financial crisis, set off dramatic chain reactions in the market, and cause great shocks to the economy and employment,” he added.