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Curbing financial risks top agenda

Writer: Winton Dong  | Editor: Jane Chen  | From:  | Updated: 2018-01-08
Email of the writer: dht0620@126.com

THE annual tone-setting Chinese Central Economic Work Conference of 2018, which ended Dec. 20, pledged to achieve substantial progress in three areas: the prevention of major risks, poverty alleviation and pollution control.

Having reached middle-income living standards in the past years, China has gradually shifted to a more intensive and sustainable rather than extensive and unbalanced way of expansion, which includes a stronger emphasis on the quality of growth, as opposed to quantity mainly measured by GDP.

President Xi Jinping said in his report to the 19th National Congress of the Communist Party of China that the world’s second-largest economy is evolving from the phase of a high rate of growth to the stage of high-quality development. Chinese citizens, therefore, highly expect more emphasis on programs to achieve deleveraging, higher efficiency in the public sector, a cleaner environment, improved public services and a better investment environment.

Among the three major tasks, the most important one is to prevent major risks, mainly financial risks. Top policymakers must control overall leverage levels both at home and abroad to ensure that they will not further rise and cause systematic financial risks.

A fundamental way to prevent domestic financial risks is to meet the financing demand of the real economy sectors. For many years, large amounts of Chinese money have been poured into housing construction and real economy has been seriously weakened. As top Chinese leaders have repeatedly said that “houses are built for living in, not for speculation,” the real estate market is likely returning to fundamentals such as demographic changes and migration, which urge developers in the country to rethink real demand in the bubbling market. According to the National Bureau of Statistics, new home prices in most cities across China were lower in December 2017 on a year-on-year basis and home prices in key cities remain stable. Home transactions in mega cities like Shanghai and Beijing are not as active as the previous year because the supply side is no longer growing after more land supplies are being allocated to public rental projects.

Local governments’ debt is also regarded as one of the most risky areas threatening economic stability. The country has used a “debt-to-bond” swap program since 2014 to shift short-term and high-default-risk debt into long-term and relatively stable bonds. To make debt risk controllable, the Finance Ministry will further tighten supervision on local government borrowing and private-public partnership projects this year.

As late Chinese leader Deng Xiaoping said, “Do two jobs at the same time and attach equal importance to both of them.” The Chinese Government is not likely to prevent domestic financial risks on the one hand while letting risks caused by external factors go unchecked. Some external challenges, such as interest rate hikes in the United States, may pose financial risks for China’s overseas investment in the near future.

To keep national financial security, China is tightening its grip on outbound investment risks, targeting both private companies and State-owned enterprises (SOE). On Dec. 18, the Chinese Government issued the Code of Conduct for private companies. The code indicates that private firms should exercise caution in high-leveraging fundraising in foreign countries, and they need to strenghten supervision over their overseas offices’ activities such as share sales.

The Code of Conduct for SOEs will also come out soon. While the code has yet to be released to the public, the overall regulation framework is the same as the one targeting private companies. The code will compliment guidelines issued in August 2017, which laid out rules curbing outbound investment in sensitive sectors such as property, hotels, sports and entertainment.

The guidelines are warnings that China is not willing to support illegal activities that are contradictory or harmful to its healthy domestic economic growth. Such measures have also proved to be effective. In the first 10 months of 2017, China’s nonfinancial outbound direct investment dropped by 40.9 percent compared with the same period of 2016.

In spite of tight investment scrutiny, China is determined to further promote opening up and cooperation with other countries. With a slew of guidelines having effectively curbed irrational and problematic buying sprees overseas, the government is stepping up legislation, so as to standardize the regulatory framework and turn separate policy documents into a comprehensive law in the coming years.

(The author is the editor-in-chief of the Shenzhen Daily with a Ph.D. from the Journalism and Communication School of Wuhan University.)