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UPDATED: July 25, 2013
Is China Headed for a Financial Crisis?
Edited by Zhang Fanruo
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Some financial market watchers have begun to fear that China is headed for economic collapse after Citigroup on July 8 cut its China growth forecast of 2013 and 2014 to 7.1 percent and 7.4 percent, respectively, and JPMorgan and Deutsche Bank lowered their projections as well. Adding to the fears, Barclays recently noted that a default risk exists in some of the small financial institutes in China and issued risk warning for several of China's public banks.

Will a financial crisis happen in China? Carson Block, founder of Muddy Waters Research, a company famous for shorting the stocks of Chinese enterprises listed in foreign market, claimed that the banks in Chinese mainland are holding more troubled assets than western banks held prior to the 2008 financial crisis.

It is true that there have been a lot of volatility in China's financial market since the beginning of this year. The interbank offered rate in Shanghai (SHIBOR) increased to 13.44 percent, reached 30 percent in the middle of trade day and hit a record high on June 20.

Data from China Central Bank showed that the balance of M2 in China exceeded a hundred thousand billion yuan. Debate over whether China has over-issued its money and that China's GDP growth is relying on currency boarding has never ceased. Will the lack of currency turn into systematic risk in China?

Lu Zhengwei, chief economist of Industrial Bank Co. Ltd., said that the future of China's economy is still bright, though the growth rate of China economy has slowed and profit margins in some fast growing industries have been cut. The problems that were triggered by high-speed growth of years past and exposed by the recent low-speed growth will not evolve into systematic risk as long as they are handled properly, said Lu.

The Chinese Government has emphasized its determination to curb regional systematic financial risks and to maintain financial stability by all means necessary in several occasions after the financial crisis in 2008.

On July 1, 2013, the General Office of the State Council promulgated the Guiding Opinions on Structural Adjustment of Economic, Transformation and Upgrading Supported by Finance ("Opinions"), which highlighted the necessity of preventing future financial risks.

The Chinese Government has always put risk control as top priority in the process of deleveraging, removing bubbles and decreasing excess capacity. Signs such as SHIBOR retuning back to 3 percent to 4 percent and the large reserve pool holdings by Chinese financial institutions show that the financial system of China is processing and releasing the pressure of deleveraging.

By the end of the first quarter, the bad loan ratio of banks in China was 0.96 percent. The total quality of capital has been stable.

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