China’s central bank said Friday the world’s second-largest economy faces increased downward pressure this year as domestic levels of debt continue to rise.
The People’s Bank of China said in its annual financial stability report that Beijing still needs to maintain ample liquidity in the financial markets amid slower economic growth.
The central bank didn’t make specific statements on ensuring ample liquidity, but it has already lowered banks’ reserve-requirement ratio twice this year, allowing them to lend more of their deposits. That has helped to offset the impact of capital outflows as economic growth slows and confidence in the country’s economic prospects weakens.
The central bank also warned the country’s commercial banks they need to continue funding local government projects already under construction despite concerns over high levels of borrowings by local authorities, mainly through the use of specially created financing vehicles.The report highlighted the central bank’s continued balancing act, as it also tries to keep the economy expanding at a healthy pace without saddling banks with bad debt. The central bank in the report warned banks they need to step up the monitoring of risk related to the country’s housing market as well as industries hit by overcapacity such as steel and cement, and local government financing vehicles.
The PBOC also said it had conducted stress tests on 28 Chinese banks at the end of last year, in an effort to measure the ability of domestic banks to endure pressure from slower growth just as authorities relax controls on domestic interest rates. The report said the central bank had concluded the banking system was generally sound.
But the central bank said the country’s midsize lenders are more vulnerable to interest-rate changes than the larger or smaller banks.
The stress test determined that Chinese banks’ net interest margin, the difference between interest paid and received, would narrow by 1.58 percentage points if deposit rates rose by 1.50 percentage points and lending rates fell by 1.0 percentage point.
The central bank also said stockbrokers need to watch for risks fromrising levels of margin trading, a major factor in the stock market’s recent rally. It nonetheless praised margin trading for providing needed liquidity to the stock market and helping support the operations of brokerage houses.
The central bank in its report said the government would continue its structural tax reform and cut fees to reduce the tax burden of companies at a time when the economy is cooling.
