China's Eco Policy to Be More Preemptive, Flexible, PBOC Says

(Bloomberg) -- China’s central bank said that macroeconomic and financial policies need to be more preemptive, coordinated and flexible in 2019, and while it warned of financial risks and global uncertainty, the bank said that overall, these are controllable.

The comments came days after the nation’s government signaled that it would increase fiscal stimulus as downward pressure on the economy is growing.

Macro Insights

  • China’s economy may face "gray rhino" type financial risks, the PBOC said in its 2018 financial stability report, referring to probable, high-impact threats that people should see coming, but often don’t
  • There’s an increase in factors that threaten global financial stability, including trade tensions, monetary tightening in developed economies, and domestic economic difficulties
  • Resolving those threatening factors will come at a cost

Financial Industry

  • People’s Bank of China ran a stress test in the first half of 2018 on 20 commercial banks with assets over 500 billion yuan ($73 billion) to assess their stability during macro shocks
    • In the base-case scenario assuming gross domestic product growth of 5.7%, five banks failed the test and the sector’s capital adequacy ratio dropped to 11.57% from 12.44%
    • In the worst-case scenario assuming GDP growth of 4.16%, half of the banks failed the test and the sector’s capital adequacy ratio dropped to 10.23%
    • Under global standards that exclude reserve capital requirements, only 2 banks failed test in the worst-case scenario
  • NOTE: The PBOC didn’t identify any of the banks
  • PBOC is considering including systemically important money-market funds in its macro-prudential management framework, and then would regularly review their performance
    • Would impose higher liquidity and investment diversification requirements on any of these funds
  • Considering acting against insurers with inadequate solvency ratios, by halting approval of institutions or new businesses and possibly forcing companies with serious insolvency issues to exit market
  • PBOC to work with financial regulators to identify systemically-important financial institutions and impose extra capital requirements
    • Bloomberg reported earlier China is considering expanding the number of financial institutions it deems systemically important

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