On December 28, the Communist Party of China (CPC) convened its Central Economic Work Conference, an annual meeting set to outline the priorities of China’s economic policies of the year to come. A major highlight of the meeting was that the central leadership put “preventing systemic financial risk” at the top of its policy concerns.
In 2017, concerns over a systemic financial crisis had already gradually moved into the center of China’s financial policies, as authorities tightened financial regulation in almost all fields.
First, China launched strong measures to combat an overheated property market. In recent decades, China has experienced runaway housing price increases which have accumulated considerable financial risk. In the past year, China released drastic measures to curb the overheated property market, including raising home loan interest rates and promoting the rental market. It is expected that China will work out a long-term policy package to keep the property market under control.
Second, China took several actions to maintain the stability of its currency. In the past years, the yuan’s continued depreciation and China’s sustained reduction in foreign exchange reserves contributed serious potential risk to China’s financial stability. In response, China took actions to limit Chinese enterprises’ overseas investments. While overseas investment in the real economy is still encouraged, the government has put investment in foreign real estate markets under tight control.
Third, China’s debt problem continues to be a major policy focus. With a level of corporate debt that is 160 percent of GDP, China has the most leveraged corporate sector in the world. Both State-owned enterprises and local governments face serious debt problems. In the past year, China has tried to encourage private capital in the State-owned sector to lower the debt level by launching public-private partnership (PPP) projects. But in some places, local governments expanded the scale of these projects, which effectively increased their debt. In late 2017, the central government put several mega-PPP infrastructure projects on hold.
Fourth, the Chinese government has noticeably tightened its financial regulation of the stock market and digital currency market. Throughout 2017, the China Securities Regulatory Commission issued a record 7.3 billion yuan (US$1.1b) in fines involving 206 cases of irregularities, 1.7 times more than the total fines issued in 2016. In September 2017, China halted operations on digital currency trading platforms, including that of Bitcoin, and made it illegal for Chinese start-ups to raise funds via initial coin offerings.
Last, there has been a major shift in the central leadership’s position on monetary policy. The official report of the keynote 19th CPC National Congress held in October, for example, says China will adopt a more prudent monetary policy, which may indicate China will drop its current growth model that is largely driven by an expansionary monetary policy.
Much of China’s concern over the possibility of a major financial crisis lies in the uncertainty posed by the administration of US President Donald Trump. As the US has launched its tax-reduction package, financial authorities are concerned it will have a knock-on effect on the global economy. Under Trump’s anti-globalization and “America First” principles, a trade war with the US also remains a strong possibility. Along with a persistent economic slowdown, China’s economy and financial stability will face some serious challenges.
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