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Market Watch NO. 38, 2015
 NO. 38 SEPTEMBER 17, 2015

OPINION 

Guarding Against Financial Risks 

Premier Li Keqiang recently presided over a special meeting of the State Council, where he stressed that financial stability affects the entire economy and called for an improvement in risk management to defend the bottom line of preventing regional or systemic risks.

The global monetary, capital and commodity markets have recently witnessed the most serious turmoil since the 2008 global financial crisis. It has arisen because developed economies and emerging markets have different macroeconomic policy options for managing economic expectations. Such turmoil has brought uncertainty to global economic recovery and will severely affect the stability of the Chinese financial market, leaving China's economy open to the complicated and severe challenges of financial risks. The priority of the Chinese Government is to improve the capability of addressing various risks while ensuring the economy operates within an appropriate range.

Several factors inside and outside China have led to the most severe challenges to the Chinese economy since the 2008 global financial crisis.

Monetary policies of various countries are the root cause of the turmoil in the international financial market during the past year. Seven years after the 2008 global financial crisis, most developed economies, including the United States, have resumed growth. The U.S. Commerce Department recently revised its estimate of economic growth in the second quarter to an annual rate of 3.7 percent, raising the expectation of the U.S. Federal Reserve raising interest rates within the year. The U.S. dollar has also been appreciating against many currencies during the past year, stimulating international capital to flow back to the United States.

While developed economies resumed growth, emerging markets didn't make real structural adjustments. This failure caused serious problems of overcapacity and high debt ratios, which made the economic structures of emerging markets increasingly unreasonable.

Among the BRICS countries, India and China have maintained growth of about 7 percent, but Russia and Brazil are likely to face negative economic growth because of the fall in bulk commodity prices. Other emerging markets are also facing problems of capital outflow, currency depreciation and financial market turbulence.

The expectation of an increase in interest rates by the U.S. Federal Reserve is causing emerging markets to experience stagnation in economic growth, a decline in investment demand and weak exports. Economic figures in the first quarter this year indicate that emerging economies have entered the worst phase since the 2008-09 crisis, and the global economy is likely to face a recession triggered by emerging markets.

In China, major indicators such as manufacturing, investment, real estate and exports have all fallen because of weak demand, despite economic growth being maintained at about 7 percent. China's contribution to global economic growth in the past few decades has been such unparalleled that uncertainty about the Chinese economy may spark fears throughout the world.

Based on the above analysis, turmoil in the global financial market will become the new norm and such turbulence will inevitably affect the stability of the Chinese economy and financial market. Judging from the conditions in the past year, China must pay attention to at least four main risks.

The first stems from the upheaval in China's stock market. Since June this year, China's stock market has plummeted several times, forcing the government to take actions to stabilize the market. However, the stock market has not yet regained stability, which may affect the stability of the whole financial system.

The second risk is debt. According to estimates by some Chinese economists, the percentage of debt against GDP in China has risen to 235.7 percent as opposed to 170 percent in 2008. The ratio of corporate debt against GDP has reached 113 percent, higher than the internationally accepted warning level of 90 percent. Under the conditions where economic growth is slowing down, such a high debt ratio may see deterioration in the financial health of companies, and the risk may expand to the financial system.

The third risk could result from the spillover effect caused by the depreciation of Chinese currency. The yuan's depreciation is a normal adjustment to its exchange rate, and China does not intend to start a currency war through depreciating its currency. However, considering the significance of the Chinese economy, some countries may follow China and depreciate their own currencies, stimulating capital to flow out of China and making the external environment less favorable for the Chinese economy.

The real estate sector forms the fourth risk. Although real estate markets in some major cities have been recovering because of a series of policies implemented by the government, most Chinese cities face difficulty in revitalizing their real estate market because of high inventories. In the first seven months of 2105, the country's investment in real estate grew by 4.3 percent compared with 13.7 percent in the same period last year. Decreasing profits, difficult financing channels, high inventories and tight capital sources are still concerns for the real estate sector.

Risks both inside and outside China pose a threat to its financial stability. We must be aware of the significance of properly addressing these risks and prevent systemic financial risks in order to maintain a stable financial market.

This is an edited excerpt from an article written by financial commentator Ma Guangyuan and published in  

NUMBERS 

7.3% 

Revised GDP growth rate of China in 2014

60 bln yuan 

Value of a China-planned nation fund to encourage the growth of small and micro-businesses

$3.56 tln 

China's foreign exchange reserves at the end of August, decreasing by $93.9 billion from the end of July, marking the fourth consecutive month of falling forex reserves

221 mln tons 

China's crude oil imports from January to August, an increase of 9.8 percent year on year

$12.29 bln 

Outbound direct investment from Shanghai in 2014, leading the country in this field

1,786 

Number of overseas projects signed by Chinese companies along the China-proposed Silk Road Economic Belt and the 21st Century Maritime Silk Road during the first seven months of the year

24,500 

Number of new energy vehicles produced by Chinese automakers in August, up 372 percent from a year earlier

$165 bln 

Spending by Chinese outbound tourists in 2014, an increase of 28 percent, comprising 11 percent of global tourism revenue

Copyedited by Calvin Palmer 

Comments to yushujun@bjreview.com
 

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