In March, China took small steps to follow the Fed in raising rates, which caused extremely tight liquidity among banks domestically. The interest rates cut at the end of 2015 by the US Federal Reserve caused a crash in global financial markets, including China’s stock market. The US interest-rate cycle is on the upswing. Of particular concern are the monetary policies of major economies, a source of uncertainty to the domestic financial markets. In addition, with the deepening of financial globalization, turmoil in the international financial markets is driving up China’s systemic risk. In some cases, regulators only act after the financial impact of excessive innovation emerges.Īll these factors show that mounting risks in the financial system require close attention. Meanwhile, domestic regulators have often failed to keep up with the pace of market development. For example, many financing platforms of local governments and corporate loans have used land and buildings as collateral, and this represents indirect credit exposure to real estate for banks. The credit exposure of banks to real estate in China was about 29.8 trillion yuan at the end of the first quarter of this year.īut the total may be much larger than the figure for direct loans suggests. Unlike other sectors, the real estate industry is more tightly connected with the financial industry and associated with rapid development of related financial derivatives. The shadow banking system in 2016 was equivalent to 64.5 trillion yuan ($9.59 trillion), with three core products: entrusted loans, trust loans and the undiscounted bank acceptance notes. In particular, the rapid expansion of shadow banks and their innovative products have posed great challenges to the supervisory authorities. Chaotic conditions exist in some areas: there is an overheated real estate industry with related nonperforming loans, local government debt is at risk of default, and Internet finance and shadow banks are putting intense pressure on systemic liquidity. Internal and external risks are weighing on China’s financial system, and an “explosion” of any of these problems could endanger the stability of the entire system.ĭomestically, economic downward pressure has been increasing, and financial risks that were formerly concealed by rapid economic growth have been emerging.