Financial Risk in ChinaPeterson Institute for International Economics

October 5, 2017

Nicholas R. LardyAnthony M. Solomon Senior Fellow

Peterson Institute for International Economics

2015 Chinese Stock Market Turbulence

1

Exchange Rate Policy Revision in 2015Aug 11th, 2015 PIIE China Economic Watch

2

The Decline in China’s Foreign Exchange ReservesApril 11th, 2016 Spring Global Economics Prospects

3

Non-Financial Sector Debt,2004 – 2022

Sources: IMF Article IV-- China4

Aug 22th, Financial Times

5

Xi Jinping’s Speeches on Financial RisksOccasions Time

Central Economic Work Conference December 2016

The 15th meeting of the Central Leading Group for Financial and Economic Affairs

February 2017

Meeting of the Political Bureau of the CPC Central Committee

April 2017

The 40th group study of the Political Bureau of the CPC Central Committee

April 2017

National Financial Work Conference July 2017

Meeting of the Political Bureau of the CPC Central Committee

July 2017

6

National Financial Work Conference:Xi’s Remarks

7

• Guarding against systemic financial risks is the eternal theme of financial work and the government should take stronger initiative to monitor, warn against and deal with risks in a timely manner.

• China will accelerate developing laws and regulations governing the financial sector, improve macro prudential management and emphasize functional as well as behavioral regulation.

• the government will continue to deleverage the economy by firmly taking a prudent monetary policy and prioritizing reducing leverage in state-owned enterprises.

• China will control local government debt growth, crack down upon financial irregularities and improve supervision on Internet finance.

National Financial Work Conference:Setup of a New Committee

8

• The State Council Financial Stability and Development Committee

• Responsible for the coordination of the country’s financial reform, development and regulation

• Target weak links in supervision and guard against systemic risks to ensure the sound development of China’s financial system and help it better serve the real economy

Interbank Market Lending,2010 Jan – 2017 Aug

% (year over year)

Sources: People’s Bank of China9

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.020

10-0

1

2010

-07

2011

-01

2011

-07

2012

-01

2012

-07

2013

-01

2013

-07

2014

-01

2014

-07

2015

-01

2015

-07

2016

-01

2016

-07

2017

-01

2017

-07

Bank Claims on Non-bank Financial Institutions,2010 Jan – 2017 Aug

% (year over year)

Sources: People’s Bank of China10

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2010

-01

2010

-07

2011

-01

2011

-07

2012

-01

2012

-07

2013

-01

2013

-07

2014

-01

2014

-07

2015

-01

2015

-07

2016

-01

2016

-07

2017

-01

2017

-07

Share of New RMB Loans by Sector,2007 – 2017 Aug

% (year over year)

Sources: People’s Bank of China11

0.010.020.030.040.050.060.070.080.090.0

Households Nonfinancial corporations and agencies

Anbang: Regulatory CrackdownBillions of renminbi

Sources: China Insurance Regulatory Commission

%

12

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

2015 1H 2016 1H 2017 1H

investment products share of total premium revenues (right axis)

Profits of State-owned Enterprises, 2007 – 2017 Aug

Billions of renminbi

Sources: Ministry of Finance

% change, year over year

13

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

0

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Aug

Profits (left axis)

Growth of Profits (right axis)

Takeaways

• The rapid growth of corporate debt poses risks• This risk has been acknowledged by China’s top leader and regulators have

responded vigorously• Interbank lending, particularly to non-bank financial institutions, is shrinking• Share of RMB lending to less leveraged households is rising, to more

leveraged corporates is falling• Major risks in the insurance sector are being addressed• Profitability of SOEs, the most highly leveraged of corporate borrowers, is

recovering• Key question remains-if growth slows from here will ultra-rapid credit growth

resume?

14