Using various approaches proposed in academic research and central banks, we monitor the systemic risk of China’s financial system at both macro- and micro-levels. Together with macroeconomic background analysis, we provide insights about China’s economic performance and financial stability, along with policy recommendations.
China’s macro-level systemic risk indicator has dropped significantly recently relative to 2018. However, micro-level indicators have soared and remained at a high level lately. Nevertheless, due to major policy shifts since late 2018, the macroeconomic performance steadied and recovered, and in particular the financing difficulties facing non-state-owned enterprises (non-SOEs) have been partially alleviated. Still, the alarmingly high micro-level indicators imply the potential risk of non-performing loans on banks’ balance sheet, resulting from both the lagging macroeconomic cyclical effects and the policy burdens from stimulating small-to-medium enterprises (SMEs) and non-SOEs financing.
Currently, the Chinese economy faces headwinds from both internal weakness and external frictions. However, the key solution lies from within – structural reform and market opening will fundamentally defuse the external shocks. Over longer horizons, the supply-side reforms should aim to level the playing fields for both SOEs and non-SOEs, or so-called “competition neutral”. Over shorter horizons, the macroeconomic countercyclical policies should be relatively loose and aim to offset the negative shocks from the trade war.

Full Text(PDF): 2019 Semi-Annual Report of China’s Systemic Financial Risk – Policy Shift and Economic Recovery

http://www.pbcsf.tsinghua.edu.cn/portal/article/index/id/4130.html