Yi Gang, deputy governor of the People’s Bank of China (PBOC), speaks during the 2017 International Finance and Infrastructure Cooperation Forum in New York, U.S.. (Photographer: Misha Friedman/Bloomberg)

China Bad Loans, Capital Outflows Stabilize, PBOC's Yi Says

(Bloomberg) -- China’s non-performing loans have stabilized and the pressure from capital outflows has eased as the nation’s economic recovery takes hold, said Deputy Central Bank Governor Yi Gang.

“NPLs are getting pretty much stabilized after a long time of climbing,” Yi said at the International Finance & Infrastructure Forum at Bloomberg’s headquarters in New York. “That’s a good development in the financial market. Capital outflow pressure has been alleviated recently, but still we have to watch that kind of phenomenon.”

China’s NPL ratio declined in the fourth quarter for the first time since 2012, suggesting the steady loan losses over much of the first half of the decade may finally be easing. China’s four biggest banks posted higher-than-forecast profit last month as provisions for souring loans held steady.

Capital outflows, which have troubled policy makers for the last two years, have also shown signs of easing as the yuan stabilizes. Foreign reserves rose in February and March after policy makers burnt almost $1 trillion since 2014 to defend the currency.

The improvements reflect a broader recovery in the world’s second-largest economy as the government increased lending, curbed overproduction and redoubled efforts to boost consumption. Gross domestic product rose 6.9 percent in the first quarter, marking the first back-to-back acceleration in seven years. Exports rose 16.4 percent in March, the most in two years. PBOC Governor Zhou Xiaochuan said at the International Monetary Fund meetings over the weekend that the nation’s 6.5 percent growth target for this year is “within reach.”

On Monday, Yi said the central bank will pursue “prudent” monetary policy, balancing the need for economic stability while reducing financial leverage and controlling “asset bubbles.” Yi pledged to improve transparency and regulation in the “shadow banking” industry, while monitoring bad loans, capital flows and housing prices to prevent systemic risks.

“The overall risk is under control,” he said.

As the economy stabilizes, the government will further open up stock and bond markets and promote the use of the yuan overseas, Yi said.

Regulators will grant more licenses to foreign banks and brokers for bond underwriting and settlement, while cutting red tapes and removing trading barriers to facilitate yuan transactions, he said. Policy makers will help create more hedging instruments and simplify tax codes to allure foreign investors to the domestic bond market, Yi added.

It is “an indication of the determination of the Chinese government to further open up the financial sector,” Yi said.