Risky Business
China Getting Nervous About Systemic Risk

The People’s Bank of China looks seriously concerned about systemic risk in the country—and is taking matters into its own hands to step up oversight, according to Reuters:

China’s central bank has been quietly boosting its policy independence and regulatory reach as it seeks to contain risks to the financial system, policy insiders said, to help ensure stability ahead of a five-yearly leadership team transition this year. […]

And by broadening the scope of the tools it uses to assess and limit the accumulation of risky assets in the banking system, it has expanded its oversight powers without getting embroiled in the kind of bureaucratic infighting that has beset plans to create a financial super-regulator.

That has given the PBOC room to maneuver at a time when it needs to contain speculative bubbles and risky lending while avoiding abrupt tightening measures that could hurt the economy.

One of the most visible examples of this trend was the PBOC’s decision to raise short-term interest rates on March 16, just hours after the Federal Reserve did so. That move was seen as an urgent attempt to help stave off capital outflows from China and ease pressure on the yuan. The central bank has also been expanding its ability to scrutinize individual banks’ books to crack down on shadow banking and new high-risk financial products.

Meanwhile, China’s political leadership has also been scrutinizing the financial sector more closely, as Xinhua notes:

In remarks published Sunday, Chinese Premier Li Keqiang pointed out that the country’s financial sector was vulnerable to risks such as bad assets, bond defaults, shadow banking and Internet financing, with frequent illegal and corrupt activities.

To put the market in order, the premier urged for efforts to crack down on bank violations on giving credit, insider trading in securities market and fraud of insurance companies, as well as to relentlessly punish internal supervisors and company managers who collude with major players in the market and steal and sell confidential information.

Taken together, the stories suggest that the Chinese are getting seriously spooked about the risky lending going on in China’s financial sector.

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