China's National Financial Work Conference raises debt issue to top-priority status

The National Financial Work Conference met in Beijing last weekend. The conference, which is held every five years, was led by President Xi Jinping. Contrary to previous times, Xi's speech shoved reforms and financial sector opening to the back burner and instead focused on the financial sector's risks and capital market's role as a servant of the real economy. Some analysts see the president's comments as evidence that China's rising debt problem has become the leadership's top concern. Xi concentrated his criticism on rapid increase of the shadow bank lending and on the state-owned enterprises, many of which are so called zombie firms kept on life support with cheap loans.

The conference had less to offer when it came to economic reforms. It celebrated the creation of a Financial Stability and Development Committee, which will operate under the State Council. It seeks to coordinating in a broad manner with the three main regulatory bodies overseeing China's banking, securities, and insurance sectors, as well as the People's Bank of China. Competition between these regulators has caused regulatory gaps and heightened market risk and indebtedness. The central bank will play a key role in the committee's work, but no detailed information has yet been released on the committee's organisation or tasks.

Several major international bodies that monitor China consider the rapid rise in indebtedness to be the top risk to its economy. The Communist Party leadership has recently adopted a harder line on corporate indebtedness. Tighter regulation should slow China's economic growth from a brisk first half.