19 November 2017
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  • » 11/07/2017, 15.38


    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.

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    See also

    05/02/2008 CHINA – WORLD BANK
    Chinese to be World Bank’s new chief economist
    Justin Lin Yifu, a Taiwan native who defected to the mainland, is one of China’s leading economists and a specialist in the field of rural development. His appointment signals the institution’s intention to bring China closer into the fold to promote ‘responsible development’ on poor countries.

    12/02/2015 CHINA
    For New Year, China's central bank has to come up with 610 billion in cash
    Such an amount is what the Chinese are expect to spend during the Lunar New Year holidays. Central bank officials must find enough liquidity without stoking inflation. At the same time, they must ensure that money markets do not seize up, and affect consumer spending. Compounding everything, some 24 IPOs are expected to lock up about 2 trillion yuan.

    01/06/2009 DUBAI
    Signs of a new financial storm for September coming from Dubai and Saudi Arabia
    Dubai calls on the Rothschild bank for help, perhaps out of desperation. In Saudi Arabia a Saad Group company defaults. US, European and Asian banks are struggling. The end of Ramadan in September might mark the start of an economic depression worse than that of the 1930s.

    14/06/2011 CHINA
    Beijing, record inflation in May. Rising food prices
    Experts now expect the economy to slow, causing a cooling of inflation. But the increases mainly affect the prices of food and essentials, with growing popular discontent.

    21/06/2010 CHINA
    Yuan jumps 0.43 per cent to five-year high
    Two days after the China’s central bank announces greater flexibility, yuan rises significantly. Chinese shares gain immediately, pulled by airliners and property shares. Everyone is now waiting for tomorrow to see if the trend will last and what the PBOC will do.

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