On Tuesday, Liu Guiping, deputy governor of the Communist Party of China (CPC) Central Bank, wrote an article in China Finance magazine suggesting that China should enact a “financial stability law” to maintain financial stability and prevent risks.
Liu Guiping, a deputy to the National People’s Congress, submitted a legislative proposal on financial security during the Communist Party’s recently concluded “Two Sessions”.
Bloomberg reported on March 16 that the “financial stability law” initiative comes as Chinese policymakers are refocusing their attention on controlling economic risks and debt. Earlier this month, Chen Yulu, vice governor of the central bank, said that establishing a system to prevent systemic financial risks will be a priority for the central bank in the next five years.
In the article, Liu Guiping wrote, “Preventing and resolving financial risks requires a solid legal foundation.”
Financial risks have been accumulating in China for a long Time, which poses a serious challenge to financial stability, Liu Guiping said, adding that vulnerabilities still exist in the system.
Current regulations on risk are scattered across different laws, with a large number of abstract principles enforced by different government departments, Liu said. He called for establishing “capital pools” to address risks, improving “loss-sharing mechanisms” and breaking down implicit guarantees for payments, though he did not elaborate on these proposals.
Regarding financial risks, Guo Shuqing, chairman of the CBRC, stressed at an official press conference on March 2 that the regulator will make risk prevention the “eternal theme” of the financial sector, monitoring and resolving all kinds of financial risks.
Guo Shuqing said he was worried about the financial market, especially foreign financial asset bubbles which will burst one day.
The risk of a financial asset bubble mentioned by Guo Shuqing is a hint that the new U.S. government’s massive stimulus package will eventually lead to increased Inflation and a devaluation of the dollar, which will also affect China, said Fu Fangjian, an associate professor at Singapore Management University’s Lee Kong Chian School of Business.
U.S. President Joe Biden recently signed a $1.9 trillion bailout package, which Communist Party policy advisers believe could lead to massive capital flows and imported inflation, which would raise China’s already high debt levels and exacerbate China’s financial risks.
According to Fu Fangjian, the inflationary pressure from the U.S. flooding will eventually be transmitted to the world, and more “hot money” may flow into China; if the volume is too large, it may bring systemic financial risks.
Zhang Xiaohui, a former assistant governor of China’s central bank, said, “The rise in yields (of U.S. Treasuries) driven by inflationary expectations will lead to asset price revaluation and even financial market turmoil, and the domestic market is unlikely to remain indifferent.”
Zhang added, “The market is very worried about an inflection point in liquidity as the world enters uncharted monetary and financial territory in the wake of the Epidemic.”
Hong Kong‘s South China Morning Post reported on March 16 that Beijing is proceeding cautiously, cutting back on stimulus measures and focusing on controlling financial risks.
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