Lou Jiwei: Systematic Financial Crisis Is Highly Probable In China
According to a report by Caixin, Lou Jiwei, former minister of Finance, said that systematic financial crisis is highly probably in China. The prevention and control of financial risks are listed as the top three major tasks in the overall success of building a moderately prosperous society in the next three years. Lou Jiwei, chairman of the National Social Security Fund, believes that the probability of systemic financial risk in China is high. There is very little room for error in preventing and resolving financial risks.
Lou Jiwei said at the 16th Enterprise Development Forum on January 28 that compared with the United States and Japan, the monetary environment in China is easier with a higher capital cost, indicating that there is a serious distortion of the financial system.
He said over-mixing operations caused a series of financial disorders, including convergence of financial service, channel financing, capital pool, ponzi-like universal insurance, P2P lending etc. Such chaotic operations resulted in the constantly rising cost of fund-raising, thus making real economy operation more difficult.
At the same time, the channels of risk transmission are extremely opaque. Compared to the US financial market a decade ago, the risk-reward properties of various derivatives are clearly defined, such as MBS, CDS, CDO are also filed. The situation in China is even worse. The risk-reward mechanism could only be recognized with penetration-type regulation. Local markets and exchanges have been established for securities, insurance, funds, and various types of innovative financial products. The probability of a systemic financial risk in China is highly obvious.
After systemic financial risks is identified, regulators have started to act accordingly. For example, banks are required to reduce their balance sheet and local government required not to issue bonds in disguised form.
“We work hard in order to win this tough fight.”
He stressed that war to mitigate financial risks could not be won in a single day. The plan is to solve the problem in 3 years.
In terms of future financial regulation. Lou Jiwei believes that Canadian financial markets are considered the most “boring” but also the most healthy one. Even after the global financial crisis, the Canadian banking system is still ranked by S & P and the IMF as the healthiest banking system in the world. China could learn from Canadian banking system.