Lending markets

Beijing could step in to stabilize markets as financial risk in China rises

Chinathe economy is shrinking and financial risks are increasing under the impact of “zero-COVID” policies and regional shutdowns across the country.

On March 25, the China Banking and Insurance Regulatory Commission (CBIRC) established the country’s first financial stability fund. Provided by Chinese banks and other institutions, the fund is intended to help protect the country from financial risks.

China’s State Council has asked the People’s Bank of China and other institutions to set up the fund no later than the end of September. To meet the deadline, the People’s Bank released the Financial Stability Law (draft for comment) on April 6, saying it was necessary since resolving financial risks had become “an eternal theme.”

The seriousness of the financial situation risk was revealed on May 10 when China Orient Asset Management Co. released its survey report on China’s non-performing financial assets market in 2022. It said commercial bank non-performing loan balances would continue to rise this year with the non-performance rate. The increased pressure from default risk would also be felt by small and medium-sized banks, trust companies, real estate companies and local finance entities.

According to Albert Song, political and economic researcher at the independent think tank Tianjun, “China’s internal financial risks are significant, with multiple breaking points.” One example, he said, was the property developer debt crisis. The crisis has the potential to affect more than 40 related industries which may already be struggling with heavy debts.

High household debt ratios of Chinese residents, which are mainly mortgages, are further fueling the crisis.

He said, “In the situation of economic downturn and city closures due to the ‘zero-COVID’ policy, these crises can erupt at any time and are likely to have a ripple effect.”

The May 16 issue of Qiushi magazine, the official newspaper of the Communist Party of China (CCP), included a featured article by the CBIRC party committee titled “Perseverance in Preventing and Resolving Major Financial Risks.” The article claimed that more than 600 high-risk financial institutions had been closed or subsequently restored over the past five years. Baoshang Bank, Jinzhou Bank, Hengfeng Bank and Liaoning City Commercial Bank were specifically named.

The CBIRC also announced that the framework for China’s first Financial Stability Fund was established after nearly $9.7 billion in seed money was raised.

“Battle of the Silver Coins”

The article also reiterated the so-called “Battle of Silver Coins” and the “Battle of Rice and Cotton,” which were started by the CCP when it usurped power in 1949 and tried to replace currency based on money by the renminbi (RMB) and to control the market price of goods.

The “Silver Coin Battle” took place on June 10, 1949. Army troops and Shanghai police surrounded and seized the securities building and arrested 250 people. The price of silver coins fell from 2,000 yuan to 1,200 yuan the next day, and the price of rice also fell 10%.

The “Rice and Cotton Battle” took place later, with the CCP trying to lower the price of these two commodities in major cities like Shanghai by transporting them from other places.

To illustrate the importance of the two actions in helping to establish communist power, the article said that it was comparable to the three major battles between the CCP and the Republic of China (ROC) government.

Albert Song provided additional insight into the CCP’s past conflicts with the ROC during a May 20 interview with The Epoch Times. He said the “battle of silver coins” and the “battle of rice and cotton” were caused by people’s distrust of the communist regime and its renminbi issuance. The CCP intervened through administrative orders and political means, suppressing domestic capitalists and businessmen.

Regarding the CBIRC article, Song said, “The fact that the CCP is now repeating these incidents reveals an intervention program and does not rule out similar actions, such as compulsory foreign currency settlements against certain cities, economic and financial sectors”.

He added, “It could also significantly reduce the $50,000 annual exchange quota available to Chinese citizens for overseas travel and spending on education and other purposes.”

The CCP’s compulsory foreign exchange regulations apply not only to individuals but also to businesses. China has a tradition of allowing exporting companies to keep part of their foreign exchange earnings to use in their commercial activities.

A meeting was held on April 22 between the CCP’s central bank, regulators and senior executives from many domestic and international banks in China, according to the Financial Times. They met to explore how to minimize China’s risks associated with international sanctions.

One of the options discussed included increasing U.S. dollar holdings abroad through mandatory foreign currency settlements, under which the CCP central bank requires exporters to convert all foreign currency earnings. foreign in RMB.

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Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is a professional engineer, registered in civil and structural engineering in Australia.