China’s top central banker lays out risks to the economy

At the press conference arranged during the party congress, central bank governor Zhou Xiaochuan fielded questions from the media on the condition of China’s financial sector. He noted that, at the general level, bubbles can develop in asset prices such as apartments, shadow banking sector products or derivatives markets. In addition, a special problem for transition economies is the poor condition of the banking sector due to a large stock of non-performing loans, as well as regulation and supervision that lags behind a rapidly evolving economy. Asset bubbles, he noted, will grow if there are too many pro-cyclical polices in place and over-optimistic expectations of economic agents. This, at some point, could trigger a sharp correction in asset prices. Zhou said this is the key risk we want to prevent. While the bubble-collapse scenario was presented as a general hypothetical, the parallels with the current Chinese economy are apparent.

 On indebtedness, Zhou noted that greater attention should be paid to the rapid increase in indebtedness of Chinese households and the true liabilities of local administrations. International institutions have long been concerned about China’s soaring indebtedness and financial sector fragility.  This was echoed in the IMF’s latest Global Financial Stability Report, released early this month.

The central bank governor has recently been active in publicly sharing his views. In an interview released this month, Zhou came out as a proponent for opening of the economy, exchange rate flexibility and dismantling capital controls. Governor Zhou says he expects to retire soon.