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CommentNovember 27 2017

Will China keep up its regulatory crackdown?

The Chinese authorities’ regulatory clampdown has entered its next phase. Will they persist, if even the economy suffers?
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The People’s Bank of China (PBoC), the country’s central bank, has asked asset managers to allocate 10% of their management fees to provisioning, and has prohibited them from promising investors a guaranteed rate of return  from June 2018.

This is the latest phase of a regulatory crackdown on China’s financial system, in a year in which the country’s authorities have made limiting shadow banking risk and over-leveraging a priority.

In early 2017, president Xi Jinping went as far as stating that financial security underpins national security and economic stability. Though the Chinese authorities have tackled financial risk before, a statement made by the president is typically considered the ultimate confirmation of policy focus.

Indeed, in 2017 China has sent its corruption watchdog after top financiers and seen financial regulators issue tighter, more coordinated directives. Among these is the PBoC’s inclusion of non-cash wealth management products in banks’ capital adequacy calculations, part of an effort to put these instruments on lenders’ books.

In early November, deputy finance minister Zhu Guangyao announced that China would allow foreign majority ownership of financial firms, which could translate into better risk management and corporate governance in domestic banks. 

There have been some results. For the first time in half a decade, China’s debt-to-gross domestic product ratio declined quarter on quarter to 268% at the end of June. Though the decline was just one percentage point, the changing composition of China’s debt is noteworthy. The growth rate of historically sky-high corporate debt is slowing (4% year on year in 2016, versus 12% in 2015), while household debt is on the rise.

But some questions remain unanswered. Chinese regulators have cracked down on shadow banking before, but soon loosened their grip once economic growth faltered. Mr Xi not mentioning the government’s growth targets at the 19th Chinese Communist Party Congress, however, might suggest higher tolerance for slower growth. 

It remains to be seen whether China will follow through on allowing foreign majority ownership in financial firms after failing to uphold merger and acquisition reciprocity for decades. What is more, China would do well to monitor growing household debt to avoid substituting one debt headache for another.

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