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PBOC Governor Zhou Sounds Blunt Financial Risk Warning

PBOC Governor Zhou Sounds Blunt Financial Risk Warning

David Cottle, Analyst


Talking Points:

  • The PBOC Governor fretted about high leverage and illegal behavior
  • He has done so before in recent years
  • But he does seem to be getting more forthright about the need for reform

We’re well into 2016’s final quarter now, but what will its end bring? The DailyFX Technical and Fundamental Forecasts are here.

China’s financial system is at increasing risk because of high leverage and needs deeper reforms according to People’s Bank of China Governor Zhou Xiaochuan.

An excerpt from his contribution to the Chinese Communist Party’s “Nineteenth Congress Counseling Book” appeared on the central bank’s website over the weekend. In it, Zhou highlighted “hidden, complex, contagious and hazardous” financial risks.

The PBOC chief broke these down into three categories. The first is at the macro level, where he said debt was too high. The second is at the micro point, with bad loans and delinquencies rising. The third was a growing risk from shadow banking and regulation avoidance. Zhou warned that structural imbalances were clear and illegal behaviour widespread.

Zhou is 69 years old and expected to retire shortly after fifteen transformative years at the helm of China’s monetary authority. His blunt warning is the latest in a series of jeremiads and speaks to one of the key problems bedevilling Chinese economic policy making.

Although impressive by Western standards, Chinese growth is now down to multi-decade lows and Beijing needs to keep the economy humming at current levels at least while reducing often-horrendous corporate debt. Zhou’s warning hints that a huge amount still needs to be done to make the system safer. He suggested that broad reform must continue and that China’s financial markets should be opened up to make them more efficient.

For financial markets, it remains to be seen which way China will jump. If the war on debt causes growth to slow still further, then intuitively commodity currencies such as the Australian Dollar may face a headwind. However, if policy action is seen as being insufficient and Chinese debt levels become viewed as in any sense out of control then that could present the sort of global market difficulties we saw at the start of 2016. Back then worries about stock overvaluation in the face of slowing growth and rising debt caused world markets to eschew risk assets.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.