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Financial Reform and China’s Growth Trajectory

문서에서 Credit and Credibility (페이지 44-47)

Reform of China’s financial system, and changing the characteristics of the banking system that have contributed to the development of credit excesses, have long been critical agenda items for China’s leaders.

After years of false starts and incomplete liberalization of China’s interest rate and exchange rate regimes, China’s leaders laid out an aggressive program of comprehensive structural reforms for China’s economy following the Third Plenum of the 18th Party Congress in October 2013, detailing 60 “decisions” of the Party to reform various aspects of China’s governance. Financial system reform was a central component of

45 Hu Jihua, “Will the Next Financial Crisis be in China,” (下一场金融危机会在中国吗) Caixin, September 7, 2015, http://opinion.caixin.com/2015-09-07/100846892.html.

46 Zhu Ning, China’s Guaranteed Bubble: How Implicit Government Support Has Propelled China’s Economy While Creating Systemic Risk (New Taipei City: Hizashi, 2016).

47 Ibid, 418. Translation by Feng Xiaodong.

the Third Plenum agenda, as fundamental to the transition toward value-based pricing of risks in a market economy.48

Following the Third Plenum, financial reforms actually accelerated much faster than those in other sectors, as more tangible action plans from key financial officials were already evident in late 2014, based on our comprehensive assessment (Rosen 2014) of the progress of the Third Plenum Decisions at that time.49 Capital account liberalization proceeded with the opening of more channels to allow the use of Chinese currency raised offshore in onshore markets. A program was launched to permit cross-border purchases of Chinese stocks and bonds, opening these markets to greater foreign influence. At the same time, a full program of liberalization of China’s previously regulated deposit and lending rates was implemented, with authorities first raising the ceilings on China’s deposit rates and then abolishing them entirely. Lending rate decisions were also liberalized, with the program essentially completed in 2015. In addition, corporate bond defaults were finally allowed to occur, introducing credit risks into some asset markets. The defaults were limited but did represent an attempt to introduce market pricing of new risks. A deposit insurance system was also rolled out in 2015, offering the possibility that larger depositors could distinguish between the creditworthiness of various banks.

While making extraordinary progress on these fronts, financial reformers remained unable to crack the difficult puzzle of what to do about regulating SOEs and local governments, which continued to enjoy not only implicit guarantees against failure but also explicit government support. Within such a half-reformed system, changes in the pricing of credit can have counterproductive effects when authorities are trying to control the growth of borrowing by these price-insensitive entities (as noted by Zhu Rongji in the quote in the previous chapter). Allowing liberalized interest rates may have the effect of boosting the cost of borrowing for everyone because state-guaranteed borrowers prioritize access to credit over its cost. The result may be more borrowing and investments in unproductive areas but financed at higher overall interest rates. This behavior was definitely evident in the bond market for China’s LGFVs. Bond buyers preferred LGFV bonds because they offered higher yields than corporate debt, but were considered government guaranteed, even though they funded projects that typically had no capacity to repay the debt.50

Introducing new credit risks or the possibility of default is similarly a difficult process within a financial system in which guarantees are the dominant assumption. While Zhu Ning’s argument on the necessity of removing these guarantees is compelling, breaking the cycle of guarantees is potentially dangerous because the change in government support is essentially a change in policy and raises questions about where new default risks will emerge. Corporate bonds might default today, but what about local

government bonds? The uncertainty of these guarantees, once they start to be removed, can lead to rapid periods of de-risking and falling prices for the underlying assets. In December 2016, for example, China’s money markets nearly froze once again after a scandal at Sealand Securities, a relatively small securities firm. The firm refused to support a few billion yuan in contracts for entrusted bond placements—

agreements to hold bonds for another institution—after the price of the underlying bonds had fallen. The uncertainty Sealand created caused market participants to question all entrusted bond contracts in the market, resulting in a sharp rise in short-term funding rates and a significant pullback in interbank lending. Introducing default risks into new asset classes, or new institutions, such as SOEs or LGFVs, could

48 Daniel Rosen, “Avoiding the Blind Alley: China’s Economic Overhaul and Its Global Implications,” Asia Society Policy Institute and Rhodium Group, October 2014, 59-72, https://asiasociety.org/files/pdf/AvoidingtheBlindAlley_FullReport.pdf.

49 Ibid, 63.

50 Rhodium Group, China Markets Research, “Losing Religion on LGFV Bonds,” July 6, 2017.

trigger even larger panics, which partially explains authorities’ reluctance to push aggressively for such steps even while implementing other portions of the financial reform agenda.

Capital account liberalization is similarly difficult, as it exposes a half-reformed financial system to the discipline of international capital flows. China’s money supply is extremely large by global standards, the largest single-country money supply in U.S. dollar terms at $25.8 trillion as of the end of 2017. Moreover, China’s money supply continues to grow at a rapid rate of around $2.0-2.5 trillion per year. This creates powerful incentives for diversification of China’s savings into foreign assets, unless there are higher-yielding investments available in China. Chinese corporates similarly have strong incentives to invest outside of China given the need to acquire strategic technology, avoid protectionism by manufacturing in foreign countries, and becoming closer to key consumer markets. Concern about strong capital outflows resulting from the diversification of domestic savings and outbound investment has caused Chinese authorities to be more cautious about full capital account liberalization, and the experience of other emerging markets during the Asian financial crisis remains a cautionary example. Capital account liberalization before reform of the domestic financial system may exacerbate some of the risks already developing within China’s financial system. In addition, if capital outflows impact deposit growth, China’s banking system and overall economy may not be able to grow as quickly and so fail to meet targeted GDP growth rates.

None of these arguments are excuses or reasons that China should not push forward with more significant market-driven reforms within its financial system. They do, however, offer some of the context behind Chinese authorities’ reluctance to move forward with a “big bang” package of reforms, along with the tendency toward gradual solutions common within China’s political establishment. In addition, the problems listed above highlight the constraints limiting China’s options in reforming its financial system.

The need to distinguish credit risks across different financial instruments calls for higher interest rates on riskier assets. In an environment of slow economic growth, this could exacerbate financial stress by driving even productive firms into default. Managing China’s debt burden over time probably requires far lower interest rates on most forms of debt within China’s financial system to reduce debt servicing costs as a constraint on growth. Otherwise, most new credit will simply be used to pay interest on existing debt.

Controlling shadow banking activities requires bringing loans back onto banks’ balance sheets, but recognizing these assets as loans constrains banks’ ability to extend new loans and maintain investment growth. These are not easy tradeoffs to manage.

But Beijing is pushing ahead in doing so, despite the risks. Starting in late 2016, Chinese authorities began to highlight the specter of financial risk as a much greater threat to stability than the potential for a slowdown in the economy. The PBOC took action by starting to guide short-term money market rates marginally higher, while also making them more volatile. As a result, the perceived returns from taking leveraged positions in speculative asset markets appeared far riskier, reducing borrowing by NBFIs. As money markets rates rose, so did the costs of issuing Negotiable Certificates of Deposit (NCDs), a form of interbank borrowing widely used by smaller banks, which were typically priced relative to SHIBOR. As NCD costs kept rising, many banks chose not to roll them over because it was impossible to get the same rates of return. Without short-term funding, banks were forced to pull back funding from NBFIs, and interbank assets or inter-financial system claims barely increased at all in 2017 (Figure 2-8). Older loans migrated back to banks’ balance sheets, forcing banks to account for them with capital provisions and loan loss reserves. Additional regulations targeting informal financing activities and the contents of WMPs and other asset management products were announced in late 2017, and were formally implemented in April

2018. Furthermore, to resolve jurisdictional issues in regulating the financial system, the State Council announced the creation of a Financial Stability and Development Committee to oversee all financial supervision.

Figure 2-8: Bank Asset Growth by Type, 2009-2017 Trillion yuan, 12m rolling sum

Source: People’s Bank of China.

The success of this effort in reducing risk in China’s financial system remains to be seen. It has obviously slowed the pace of credit growth in the aggregate, with total bank asset growth only 8.4 percent in 2017.

Most of the squeeze has been felt by joint-stock banks, which relied heavily on interbank funding

instruments such as NCDs. Joint-stock banks’ asset growth was only 3.4 percent in 2017.51 Corporates have also seen a significant decline in borrowing; within formal loans, there has been a sharp shift toward household borrowing linked to the property market, where credit demand has been stronger. Nonetheless, key obstacles remain, primarily linked to the persistence of SOEs’ and local governments’ implicit

guarantees. Chinese financial markets still carry a widespread belief that just as in 2013 during the credit crunch and in 2015 during the equity market meltdown, any significant financial stress will prompt aggressive government intervention to support the market. As a result, risky behavior continues, even while the regulatory noose has tightened and overall credit growth has slowed.

문서에서 Credit and Credibility (페이지 44-47)