Proactive prudential regulatory measures are critical to curb risks in real estate loans, local government debt and the fintech sector, a China central bank official said Thursday.

Photos: VCG

“Current financial issues in China are very unique, which means the problems we are facing are more complicated and some risks have deep-rooted legacy reasons. We must be more proactive in addressing different kinds of hazards, release some pressure through minor shocks to avoid major violent earthquakes, and adopt an ex-ante, active and holistic approach to correct deviations and restore economic and financial balance,” Guo Shuqing, deputy governor of the People's Bank of China (PBC), said at the Lujiazui Forum in Shanghai. 

He noted debt defaults are a part of doing business and China’s default rate is lower than many other countries.

Reducing fintech risks

In a statement that could be targeted at the wide array of financial products now available for purchase on people’s mobile phones, Guo noted, “High return means high risk. Products with a promised return over 6 percent should be doubted, over 8 percent should be regarded as very dangerous, and over 10 percent means investors should be prepared for total loss of principal.”

At the beginning of 2018, the central bank proposed to "further improve the macro-prudential policy framework and explore the inclusion of shadow banking, real estate finance, and internet finance in macro-prudential policy frameworks."

Identifying risks

To manage systemic risks emerging from areas such as real estate loans, local government debt, and the fintech sector, regulators have set macro-prudential supervision indicators to strengthen regulations and intervene early, Guo said. 

Analysts note macro-prudential supervision has already been applied relatively rigorously in the banking industry. 

The macro-prudential supervision model aims to evaluate risk to the overall financial system, rather than each institution’s financial health. Regulators do this by conducting timely risk monitoring, with warnings and controls by the authorities. The model also looks at the system that links organizations.

Measures include formulating a series of careful and prudent operating rules. 

Analysts pointed out that problems like shadow bank funds, loan embedding, regulatory arbitrage, low transparency, and high leverage ratios are concentrated in real estate, high tech financing platforms and other areas. 

“Reining in financial risks is a systematic project. We must promptly take effective measures to effectively manage major risky events,” Guo said. 

Real estate and local debt

Since the government’s most recently imposed policies to reduce risk in the property market, the growth rate of real estate loans has declined slightly — 0.6 percent lower than at the end of 2017, according to central bank data.

The percentage of property development loans for affordable housing rose 2.9 percentage points to 64.7, signaling a shift away from speculative investment properties.

Another area of risk the bank is trying to control is local government debt. All bonds issued by local governments in the first four months of this year were replacement debts. The 17.1 billion yuan ($2.66 billion) in local bonds issued in May was the first batch of new local bonds this year, Beijing Business Today analysis noted. This is a small fraction of the 876.6 billion yuan worth of bonds local governments have issued.