How big is China's financial risk?

Ten years after the financial crisis, global financial market volatility has intensified and it is difficult to return to pre-crisis levels. In contrast, domestic financial risks are also at a high level. How big is China's current financial risk exposure?
“From the fourth quarter of 2015 to the first quarter of 2017, China’s external infection risks, market and liquidity risks and risk appetites have risen further, macroeconomic risks and credit risks have declined, and monetary and financial conditions have tightened.” June On the 18th, the China Financial Risk and Stability Report (CFRSR) 2017 (hereinafter referred to as the “Report”) jointly developed by China Eastern Finance and the First Financial and Economic Research Institute expressed this.
The "Report" was led by Zhu Min, Dean of the National Finance Research Institute, and the Deputy Editor-in-Chief of the First Financial Daily, Yang Yanqing, Dean of the First Financial and Economic Research Institute, and Xiao Shunxi, Chairman of the Eastern Airlines Financial Control Co., Ltd., as the co-editor; Sun Tao, former senior economist of the International Monetary Fund (IMF), Gao Zhanjun, managing director of CITIC Securities, Jiang Chao, chief economist of Haitong Securities, Guan Tao, senior researcher of China Financial Forty Forum, and Peng Wensheng, global chief economist of China Everbright Securities Liu Chenjie, Chairman of Wangzheng Capital Global Hedge Fund.
"Report" Advisory Committee by Zhu Min and Chairman of the National Finance and Development Laboratory Li Yang, Assistant to the Chairman of the China Securities Regulatory Commission Xuan Changneng, Director of the Financial Stability Bureau of the People's Bank of China Lu Lei, Chief Strategy Officer of Ant Financial Services Chen Long, Haitong Securities The general manager of the company, Qiu Qiuping.
The Report introduces the IMF's global financial stability map methodology, selecting external infection risk, macroeconomic risk, monetary and financial conditions, risk appetite, market and liquidity risk, and six sets of credit risk indicators to comprehensively construct identification and quantitative assessment. China's financial risk system and model - China's financial stability map.
“China’s financial risks are at a high level, and the macro debt level is generally high. At the micro level, corporate debt payments are still serious. Liquidity and market interest rates are tight. At this high level, if there is an external shock, there will be big trouble. So, Need to be alert to the impact of external economic and financial fluctuations on China's economic and financial." Zhu Min said at the press conference.
The "Report" examines the financial risks of bond market, housing market and foreign exchange market one by one, and also analyzes the financial market under the background of economic imbalance. It is pointed out that from the perspective of financial market itself, strengthening resilience is to strengthen supervision and promote financial reform. The direction. In addition, it is more necessary to jump out of the vision of local financial markets, solidly promote supply-side reforms, and seek stability through reform.
The Executive Summary of the Report shows that overcapacity, low return on investment, and rising non-performing assets of banks – in this context, the bond market defaults frequently and corporate leverage has risen rapidly, which is worrying.
In fact, in the second quarter and the fourth quarter of 2016, two rounds of bond market shocks have been staged. The "Report" believes that the current bond market mainly faces the following three major risks: first, credit risk; second, liquidity risk, the outstanding problem is deleveraging; and finally, spillover risk, which may lead to the spread and spread of financial risks.
At the same time, the real estate market in 2016 was extremely hot and continued until the first quarter of 2017, but it began to cool down significantly in the second quarter. The "Report" pointed out that the risks caused by overheating in the previous housing market have not yet dispersed, and the real estate boom has given rise to many risks.
According to the "Report", from the perspective of the loan leverage ratio of residents buying houses, the proportion of new residents' medium and long-term loans to the sales of residential commercial housing has soared from 24.9% in 2012 to 57.3% in 2016. This means that the average down payment ratio in 2016 accounted for less than half, or even significantly lower than the corresponding proportion in the United States in 2007.
From the bank's point of view, incremental loans over four have become real estate loans. In terms of stocks, the balance of real estate loans of major financial institutions at the end of 2016 was 26.7 trillion yuan, accounting for a quarter of the total loan balance. Incrementally, in 2016, various loans increased by 12.6 trillion yuan, of which real estate loans increased by 5.7 trillion yuan, an increase of 45%. If you consider bank off-balance sheet business, the ratio may be higher.
The "Report" also pointed out that in 2016, the RMB exchange rate was facing depreciation pressure. The foreign exchange market and the balance of payments were generally in a "negative situation", market confidence was further weakened, and the government's ability to maintain exchange rate stability faced a greater test.
However, as of May 2017, foreign exchange reserves have rebounded for four consecutive months, and cross-border capital flows have continued to stabilize. In the first quarter of 2017, the bank's short-term foreign exchange settlement and sales deficit was US$30.5 billion, down 79% and 73% year-on-year and quarter-on-quarter respectively. The relationship between foreign exchange supply and demand improved significantly.
In order to manage the increasingly complex financial system, the Report recommends, first, to improve the resilience and self-regulation of financial markets. This requires that on the one hand, regulators should improve their tolerance to local risks, regulate the financial market order and improve financial supervision functions on this premise; on the other hand, they should also pay attention to risk spillovers and contagious effects to prevent systemic risks from occurring. Strengthen the order and coordination of financial supervision.
Second, seek truth and stability with reform. It is necessary to jump out of the partial equilibrium of the financial market and achieve financial stability in the process of promoting supply-side structural reform. Specifically, effective reform measures are used to increase the expected rate of return of the market, boost the investment enthusiasm of the private sector, strengthen market investor confidence, and provide a solid foundation for financial stability by optimizing resource allocation and improving economic efficiency.

China's financial risk is at a high 15%, companies are still borrowing new and old
“15% of Chinese companies have ICR (interest reserve ratio) less than 1, which means that these companies are still borrowing new ones.” On June 18, Zhu Min, president of the National Finance Research Institute, “managed increasingly complex finances. The "System" seminar and the "China Financial Risk and Stability Report (CFRSR) 2017" (hereinafter referred to as "Report") conference pointed out.
Zhu Min said that since the financial crisis in 2008, the global economy and finance have been highly correlated. The correlation between the three major markets of global stock market, money market and bond market has increased from around 40% in 2008 to around 67% today. "From information to confidence, from confidence to contagion, from contagion to panic, from panic to volatility." Zhu Min pointed out that not only the financial market, but also the movement of the real economy began to interact.
Zhu Min said that China and the United States can reach 60% in the crisis. Need to be alert to the impact of external economic and financial fluctuations on China's economic and financial.
Zhu Min believes that whether external volatility will form a national financial volatility or a crisis depends on its internal macro structure and defects. Its flexibility and policy space depend on its “toughness”.
Zhu Min pointed out that China's financial risks are at a high level, and the macro debt level is generally high. At the micro level, corporate debt payments are still serious. Liquidity and market interest rates are tight. At this high level, if you encounter an external shock, you will have a big problem.
ICR1~2 is a high-risk stage, and 2~3 and above are normal levels. About 15% of companies have an ICR of less than 1, indicating that China's debt level is generally high. Zhu Min said that when external risk pressures come, this 15% will expand. Therefore, the micro-risk basis cannot be underestimated.

Sun Tao: China's financial stability faces six major challenges
"China's financial stability mainly faces six major challenges, namely economic imbalance and return on investment; the total debt scale continues to rise and shadow banking continues to expand; housing prices in some cities fluctuate sharply; capital outflows and RMB depreciation; increasingly complex international environment; domestic External risk contagion increases,” Sun Tao, a senior economist at the International Monetary Fund (IMF), pointed out at the press conference.
Sun Tao pointed out that China's financial stability must be analyzed, judged and maintained from the perspective of the global capital cycle.
In the short run, capital controls, including anti-money laundering, anti-terrorism and information-sharing measures, help maintain China's financial stability; in the medium term, increase return on investment and total factor productivity, and reduce domestic money and credit growth ( De-leverage) contributes to the long-term stability of China's finance. Whether or not the above-mentioned medium-term goals can be achieved depends on the intensity and speed of domestic real market reforms.
Sun Tao also pointed out that only by promoting reform can there be real stability. The growth of the real economy is the key, private sector investment is the guarantee, market reform and continued openness is the direction.

Gao Zhanjun: China's bond market leverage is misunderstood
“The current bond market leverage ratio has been misunderstood.” In response to the dispute over the bond market bubble for a period of time, Gao Zhanjun, managing director of CITIC Securities, said at the press conference that the leverage ratio currently used in the market has not accurately reflected the degree of risk in the market. .
The so-called bond market leverage ratio reflects the extent to which investors use borrowed money rather than their own funds when investing in bonds. Usually, the bond market's overall leverage ratio (on-market) = bond custody balance / (bond bond balance - financing balance)" to calculate.
Gao Zhanjun believes that this is an overly simple definition, and the actual situation is far more complicated. The above formula only reflects the leverage ratio in the market, and does not consider the situation of off-market leverage (implicit leverage). The leverage ratio outside the market is generally increased through structured grading products and offline financing (such as bond holding). Measurements, and when the bond market is hot, the impact is often large.
In his view, the three major risks of credit risk, liquidity risk and spillover risk in the current bond market are outstanding. He believes that the current bond market risks should be addressed from the four perspectives of establishing a long-term regulatory mechanism, improving the default disposal mechanism, rebuilding the liquidity provision framework, and improving the interest rate system.

Jiang Chao: The “bubble” in the housing market is taking shape, limiting speculation, differential tax rates, and raising interest rates cautiously.
“The real estate market has formed a bubble. The response to the bubble needs to limit speculation, differential tax rates, and careful rate hikes,” Jiang Chao, chief economist at Haitong Securities, pointed out at the press conference.
Jiang Chao pointed out that the restriction on purchases and loans has cooled the housing market. At the same time, real estate financing has been tightened, credit policies have tightened, bond financing has tightened, and non-standard and overseas bond issuance has become stricter. Jiang Chao said that at the current time, the leverage of residents and enterprises that were pushed up in the previous period is still high, and the housing price increase is slowing down but the asset bubble still exists. In the short term, it should continue to restrict speculative purchases, including restrictions on purchases and loans, to continue to consolidate the previous period. Regulate the results and continue to squeeze the bubble.
Jiang Chao believes that in the future, we should further strengthen the management of land supply, actively and flexibly regulate the scale of land supply, remove inefficient supply and inefficient supply, rationally plan land use, increase effective supply, and thus provide a long-term mechanism for the healthy development of the real estate market from the supply side. form.
Jiang Chao said that in the long run, the property tax should be gradually introduced, and the differential tax rate should be implemented as a local tax. But be careful to raise interest rates to avoid piercing the bubble. "It can't help the real estate bubble to cause overheating, and it can't be squeezed and it will cause serious damage to the economy."

Guan Tao: Introducing the counter-cyclic factor exchange rate policy is still facing the test
"In the current reference to a basket of currency adjustment mechanism, the introduction of the counter-cyclical adjustment factor is actually a perfection of the exchange rate mid-price pricing mechanism. The original mid-price pricing mechanism mainly reflects the external shock, and now the internal domestic economy through the counter-cyclic factor The variables are also taken into account.” Guan Tao, a senior researcher at the China Financial Forty Forum, pointed out at the press conference.
Guan Tao said that multi-pronged approach to prevent cross-border capital flow shock risks requires further improvement of the credibility of the RMB exchange rate policy. This includes improving market operations and further improving the RMB exchange rate formation mechanism. While enhancing exchange rate flexibility, it will maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.
Guan Tao pointed out that the introduction of the countercyclical factor has not changed the direction of exchange rate reform. "Next, the market will observe how the countercyclical factor operates. So far, no more details have been seen. The market is worried that the pricing mechanism will be less transparent, which needs to be observed in operation." Guan Tao said.

Peng Wensheng: Optimistic about US financial risks
Peng Wensheng, chief global economist at Everbright Securities, believes that although some of the US economic indicators have been lower than expected recently, the overall economic recovery is actually beyond expectations.
What is the financial risk in the United States? “From the perspective of the wholesale market, there may be some risk of stampede.” Peng Wensheng said at the press conference that the recent BIS study shows that pension funds and insurance funds have formed in asset allocation and long-term interest rates in the past few years. A self-reinforcing mechanism, that is, the lower the long-term interest rate, the asset-end gains of long-term liabilities in the future will encounter some problems, so it is forced to buy long-term national debt, which leads to the greater the long-term interest rate going down. Once the central bank raises interest rates and fiscal expansion, inflation risks increase, the whole mechanism may be reversed, and the long-term government bond interest rate rises more than expected.
"On a broader level, I am still optimistic about whether the US economy has a systematic financial risk." Peng Wensheng judged that the United States is currently in the early stages of rising financial cycles, and financial markets may have some fluctuations, but The possibility of large systemic risks is very limited.

Liu Chenjie: Financial supervision has come to the turning point and is expected to "not be stricter"
"The domestic financial supervision has reached an inflection point, that is to say, it will not be more serious." At the press conference, Liu Chenjie, chairman of Wangzheng Capital Global Hedge Fund, believes that the current financial cycle is in a rising stage, and whether it is suitable at this time. Further strengthening financial supervision needs to be reconsidered.
“High leverage or high debt does not represent a large financial risk. However, if the long-term return on real economic investment is lower than the cost of financing, you need to be cautious.” Liu Chenjie said that this time Strengthening financial supervision is not appropriate and worth considering.
According to his estimation, in the baseline scenario, that is, the supply-side reform is progressing steadily, the recovery rate of China's real economic investment return rate will remain at the end of 2016 from 2017 to 2020. Then, the overall leverage ratio may remain high in the next five years, but it will rise slowly, gradually increasing from 249% at the end of 2015 to 290% in 2020.
He suggested that in the context of the end of the global monetary easing in March this year, which means that the risk-free rate of return will rise, it is necessary to conduct a comprehensive “physical examination” of the state-owned assets department and the financial department, so as to assess how much policy space is. And reconsider whether it is appropriate to do strong financial regulation at this time.
(This report was published by reporters Song Yikang and Du Qingqing from Beijing)

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