China’ s authorities aware of financial risks but careful, patient measures needed

China has created “the largest macro bubble in our lifetime,” the New York Times said recently, citing an analyst at Capital Economics. Although exaggerated rhetoric is often used by Western economists in regard to the Chinese economy, risks in the country’s fi nancial system do deserve attention. Financial risks are mounting on the back of the recent surge in the property market and rising corporate debt, and the government is aware of the problem. In fact, curbing risks in the fi nancial sector has become a prominent topic of discussion in China.

People’s Bank of China Governor Zhou Xiaochuan said Tuesday in Shanghai that high leverage, low capital and nonperforming loans shouldn’t be tolerated. The words came after former IMF Deputy Managing Director Zhu Min warned that China is facing a high level of fi nancial risk.

China has a clear understanding of what is really happening in its fi nancial system. Contrary to what some Western media reports claim, the country has strong crisis awareness. China- based think tanks, including the Chinese Academy of Social Sciences, have pushed for extensive research and studies into the worsening fi - nancial problems, in the hope of fi nding an appropriate solution. China has not and will not turn a blind eye to the escalation of fi nancial risk.

At the end of last year, the Chinese authorities made it clear that there would be more emphasis on preventing and controlling fi nancial risk in 2017. The government has stepped up eff orts to tighten supervision of stock markets and curb shadow banking to prevent systemic fi nancial risks. We predict that China will continue to make risk management in its fi nancial system a priority for the remainder of this year, and more stringent measures may be launched in the battle to curb fi nancial risk.

However, given that radical and drastic reform often leads to fi nancial turbulence, China’s eff orts to improve fi nancial regulation should, more realistically, be implemented step by step with patience. China’s banking system is now the largest in the world. It will not be easy to make sure the country’s increasingly complex fi nancial system runs smoothly.

It seems the government wants to rely on targeted, precise measures, rather than radical reform to curb fi nancial risks, but this may lead to misunderstandings that the authorities are ignoring the major problems. What the government needs to do is to enhance the transparency of its policymaking and communicate better with the market, in order to build up confi dence toward China’s fi nancial regulations and win the trust of the international community.