Feb 27, 2019 07:58 PM

Central Bank Outlines Policy Priorities, Warns on Risks

The headquarters of the People's Bank of China in Beijing. Photo: VCG
The headquarters of the People's Bank of China in Beijing. Photo: VCG

* The People’s Bank of China released its to-do list for 2019 Tuesday, in which it said financial market reform and improving the bond market’s ability to support the economy would be priorities for the coming year

* The monetary authorities have already taken a slew of measures to encourage lenders to bolster their balance sheets so they can expand lending in the cooling economy

(Beijing) — The People’s Bank of China (PBOC) has outlined its priorities for the coming year, pledging to improve guidance on credit policies while promoting innovation and reform in financial markets, and strengthening the bond market’s role in supporting the economy.

The lengthy to-do list, published on the central bank’s website late Tuesday, was accompanied by a warning that the economy faces growing downward pressure and that it “remains an arduous task to prevent and defuse financial risks.”

In the wake of President Xi Jinping’s call on Friday for a deepening of supply-side structural reform in the financial sector, the PBOC said it would push forward with the work in order to provide more efficient and higher quality credit support to the real economy, according to its statement (link in Chinese) which was published after a two-day meeting to set policy priorities for 2019.

President Xi made the remarks (link in Chinese) during a group study session of the Communist Party’s Politburo on Friday that focused on structural reform in the financial sector. Xi also urged efforts to strengthen the financial sector’s ability to serve the real economy and strike a balance between implementing pro-growth measures and controlling financial risks.

The role of the bond market in replenishing banks’ capital will be strengthened, and the authorities will push forward a market-oriented mechanism to deal with bond defaults, promote further opening-up of the bond market and support innovation both in the market system and products, according to the PBOC’s statement.

Forever debt

The monetary authorities have taken a slew of measures to encourage lenders to bolster their balance sheets so they can expand lending in the cooling economy. In the latest moves, the PBOC has allowed banks to sell perpetual bonds, a type of debt that doesn’t have a fixed maturity and can pay interest to investors forever if needed. The bonds are commonly used globally by banks to replenish capital.

Bank of China, one of the country’s “big four” commercial lenders, became the first to issue such bonds, selling 40 billion yuan ($5.8 billion) in January.

Last week, central bank vice governor Pan Gongsheng said the monetary authority is exploring further measures to promote the use of perpetual bonds by banks and demand for such debt from investors.

In an interview with state broadcaster CCTV on Tuesday, Pan said there are still structural problems in the way financing is supplied in China that hinder of the efficient allocation of financial resources. The corporate sector still relies too heavily on indirect financing, especially through the big banks (rather than direct financing channels including the bond and equity markets), and the use of equity financing is insufficient, he said.

Efforts to deepen structural reform in the financial sector will require a continued commitment to a prudent monetary policy to ensure a sound market environment, Pan said. There also needs to be an improvement in the networks, services and governance of financial institutions, he said.

The crackdown on financial risks has shown initial effect and regulators will continue deleveraging efforts to reduce risks in major areas, Pan said. They will also improve the financial supervision system and mechanisms to deal with risks.

Reflecting the Communist Party’s focus on debt relief and help for small businesses, the PBOC said banks should improve their services and offer targeted support to small and micro enterprises, and that financial tools will be used to support poverty relief efforts.

Financial risks

More measures will be rolled out to promote debt issuance by non-government entities and develop asset securitization, according to the statement. The central bank will also improve the monetary transmission mechanism to enhance policy efficiency.

Turning to financial risks, the PBOC said policy coordination will be improved to fend off dangers and regulation will be stepped up on property financing, the gold market and commercial bill market. The crackdown on internet financing will continue.

Earlier this week, Wang Zhaoxing, vice chairman of the China Banking and Insurance Regulatory Commission, told a media briefing that banks are being urged to tighten oversight of property lending.

Wang also pledged stricter supervision over arbitrage activity involving commercial bills, after bill financing surged to a record high in January. Wang’s comments reflect concerns, highlighted by Premier Li Keqiang earlier in February, that arbitrage activities, where investors use low-interest short-term loans to invest in higher-yielding wealth management products, could be leading to higher financing costs for companies and affecting the efficiency of new funds entering the real economy.

Contact reporter Han Wei (

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