Bank of China Governor warns of China’s financial fragility

For Zhou Xiaochuan, demands by local governments for looser monetary policy to boost growth is behind the problem. China’s M2 stood at US$ 24.95 trillion last September. Overall borrowing is 260 per cent of GDP.


Beijing (AsiaNews/Agencies) – China’s financial situation is fragile because of constant calls by local governments for looser monetary policy to boost growth, says China’s central bank chief in an article published on the website of the People’s Bank of China (PBOC).

Zhou Xiaochuan has been PBOC governor for the last 15 years, and is expected to retire in the next few months. In his article, he complains that the central bank is expected to turn on the cash taps to support growth irrespective of market conditions.

“[In the good times] all industries and local governments enthusiastically pursued rapid growth and demanded [the central bank] ease money supply,” Zhou writes.

As a result, financing activities boom, credit supply increase, and market players start to be overly optimistic, “generating asset price bubbles”.

However, as risks mount and financial markets come under pressure, all sides call for the PBOC to come to the rescue with looser monetary policy, Zhou notes.

For the governor, this distortion of monetary policy, mainly by local governments eager to speed up development, has been a source of systemic risk in the world’s second-biggest economy because of the high financial leverage and excessive corporate debt it induced.

Indeed, for the past 15 years, China’s broad money supply, M2, surged from 18.5 trillion yuan at the end of 2002 to 165.6 trillion yuan (US$ 24.95 trillion) at the end of September 2017.

At the same time, corporate debt surged to 159 per cent of the economy in 2016, compared with 104 per cent ten years ago, whilst overall borrowing climbed to 260 per cent.

In view of the situation, Zhou wants to see the elimination of “zombie” companies, state-owned enterprises, which maintain high levels of employment irrespective of market conditions, whilst expecting the government to cover their debts.