People’s Bank of China chief Zhou Xiaochuan on financial crisis risk

Zhou Xiaochuan, governor of the People's Bank of China, speaks during a press conference at the media center on March 10, 2017 in Beijing, China.

Lintao Zhang | Getty Images

Zhou Xiaochuan, governor of the People’s Bank of China, speaks during a press conference at the media center on March 10, 2017 in Beijing, China.

China’s central bank boss spelled out his strategy to prevent a future financial crisis, urging broadened equity funding along with direct finance to reduce corporate leverage along with eliminate “zombie” companies, official media reported on Saturday.

Zhou Xiaochuan, Governor of People’s Bank of China, said in which the market should play a “decisive role” in allocating financial resources, however also stressed the importance of stronger regulation along with Communist Party leadership in guiding financial reform, according to the Shanghai Securities News.

In warding off systemic financial risks, China should deal with “both cause along with symptoms,” along with be active in “both preemptive measures along with reactive solutions,” Zhou wrote in an article aimed at helping the public deepen understanding of last month’s 19th Communist Party Congress report.

During the Congress, Zhou, who is actually widely required to step down soon, spoke of the risks of a “Minsky moment”, referring to a sudden collapse in asset prices after long periods of growth, sparked by debt or currency pressures.

China has so far avoided a sharp slowdown in its economy, however analysts along with global economic bodies such as the International Monetary Fund warn Beijing in which China is actually over-indebted. Rating agencies estimate the overall debt burden at almost three times annual economic output.

In his article, Zhou said in which China should “actively develop equity financing, along with steadily increase the proportion of direct finance.”

In direct finance, borrowers borrow funds directly through the financial markets without using intermediaries, potentially reducing risks from the banking system.

The more specific measures Zhou suggested included reforming China’s equity issuance mechanisms, further developing private equity funding, promoting debt-to-equity swaps, along with expanding the bond market.

Meanwhile Zhou also called for further financial deregulation, saying China will relax management of its forex market, promote yuan internationalization along with broaden market access by foreign financial institutions.

however in what may been seen as balancing measure to such market-friendly steps, Zhou also stressed the importance of tougher supervision, urging regulators along with local governments to
crack down on illegal arbitrage, shadow banking, along with “illegitimate fundraising” in which disrupted market order.

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