Guarding Against Financial Risks

Premier Li Keqiang recently presided over a special meeting of the State Council， where he stressed that financial stability affects the entire economy and called for an improvement in risk management to further prevent regional or systemic risks.

The global monetary， capital and commodity markets have recently witnessed the most serious turmoil since the 2008 global financial crisis. It has arisen because developed economies and emerging markets have different macroeconomic policy options for managing economic expectations. Such turmoil has brought uncertainty to global economic recovery and will severely affect the stability of the Chinese financial market， leaving Chinas economy open to complicated challenges of financial risks. The Chinese Governments priority is to improve its capability of addressing various risks while ensuring the economy operates within an appropriate range.

Several factors inside and outside China have led to these challenges to the Chinese economy.

The monetary policies of various countries have been the root cause of the turmoil in the international financial market during the past year. Seven years after the 2008 global financial crisis， most developed economies have resumed growth. The U.S. Commerce Department recently revised its estimate of economic growth in the second quarter to an annual rate of 3.7 percent， raising the expectation of the U.S. Federal Reserve lifting interest rates within the year. The U.S. dollar has also been appreciating against many currencies over the past year， stimulating international capital to flow back to the United States.

While developed economies resumed growth， emerging markets didnt make real structural adjustments. This failure caused serious problems of overcapacity and high debt ratios， which made the economic structures of emerging markets increasingly untenable.

Among the BRICS countries， China and India have maintained growths of about 7 percent， but Russia and Brazil are likely to face negative economic growth because of the fall in bulk commodity prices. Other emerging markets are also facing capital outflow， currency depreciation and financial market turbulence.

The expectation of an increase in interest rates by the U.S. Federal Reserve is causing emerging markets to experience stagnation in economic growth， a decline in investment demand and weak exports. Economic figures in the first quarter of this year indicate that emerging economies have entered their worst phase since the 2008-09 crisis， and the global economy is likely to face a recession triggered by emerging markets.

In China， major indicators such as manufacturing， investment， real estate and exports have all fallen because of weak demand， despite economic growth holding steady at about 7 percent. Chinas contribution to global economic growth in the past few decades has been so unparalleled that uncertainty about the Chinese economy may spark fears throughout the world.

Based on the above analysis， turmoil in the global financial market will become the new normal and such turbulence will inevitably affect the stability of the Chinese economy and its financial market. Judging from conditions over the past year， China must pay attention to at least four main risks.

The first stems from the upheaval in Chinas stock market. Since June， the stock market has plummeted several times， forcing the government to take actions to stabilize the market. However， the stock market has not yet regained stability， which may affect the stability of the whole financial system.

The second risk is debt. According to estimates by some Chinese economists， the percentage of debt against Chinas GDP has risen to 235.7 percent as opposed to 170 percent in 2008. The ratio of corporate debt against GDP has reached 113 percent， higher than the internationally accepted warning level of 90 percent. Under conditions where economic growth is slowing down， such a high debt ratio may see deterioration in the financial health of companies， and these risks could spread to the financial system.

The third risk could result from the spillover effect caused by the depreciation of Chinese currency. The yuans depreciation is a normal adjustment to its exchange rate， and China does not intend to start a currency war through depreciating its currency. However， considering the significance of the Chinese economy， some countries may follow China and depreciate their own currencies， stimulating capital to flow out of China and making the external environment less favorable.

The real estate sector forms the fourth risk. Although real estate markets in some major cities have been recovering because of a series of policies implemented by the government， most Chinese cities face difficulty in revitalizing their real estate markets due to high inventories. In the first seven months of 2015， the countrys investment in real estate grew by 4.3 percent compared with 13.7 percent in the same period of last year. Decreasing profits， difficulties in securing reliable financing channels， high inventories and tight capital sources are still concerns for the real estate sector.

Risks both inside and outside China pose a threat to the countrys financial stability. We must be aware of the significance of properly addressing these risks and prevent systemic financial risks in order to maintain a stable financial market.