China's systematic financial risk report in October: private enterprises are under obvious pressure in the context of deleveraging
Zhou Hao, Chen Xiangpeng, He Biqing, Zhao Jing
Recently, under the combined effect of domestic and foreign factors, China's financial market has experienced a period of high risk, and the real economy is also under downward pressure. Especially for joint-stock commercial banks, many systemic financial risk indicators have reached new historical highs. It is judged in this report that the formation of this high-risk period is due to the unstable expectations of China's financial market caused by the impact of the international environment such as Sino US trade frictions on the one hand, and the gradual exposure of cyclical and institutional problems accumulated by China's economy over a long period of time in the reform and transformation period on the other hand.
Background analysis
In the second half of 2018, the impact from the uncertainty of the international environment and the relatively concentrated release of domestic potential risks made the Chinese financial market enter a period of high volatility. Especially since October, the high volatility has been particularly significant. The Shanghai Composite Index once reached 2449 points, the lowest value since the middle of 2015. The dollar yuan exchange rate broke through the 6.97 threshold, a new low in 10 years. The sharp fluctuations in the financial market have added new challenges to the further reform and transformation of the real economy. Market participants and regulators have deep concerns about whether the recent sharp fluctuations will lead to systemic financial risks.
Global trade protectionism and Sino US trade frictions are still the main challenges facing China from the international environment. Since the US President Trump officially signed a trade memorandum with China based on the results of the "301 investigation" on March 22 this year, the trade friction between China and the United States has turned from trial to reality. The United States has successively announced the imposition of tariffs on goods with a total price of 250 billion dollars, and China has also taken necessary countermeasures. The impact from the international environment has brought panic and pessimistic expectations for the future to the Chinese financial market, which is the incentive for this high-risk period.
The domestic supply side reform has entered the deepwater area, and the strong supervision and deleveraging of the financial industry have contributed to the long-term economic transformation and healthy development. However, in the short term, it has impacted the operation of some financial institutions and investor sentiment, and there is a possibility that the potential risks will be released too quickly and too intensively. In the context of the slowdown of economic growth, excessive deleveraging, strong governance of large asset management, and tight regulation of real estate have led to serious pressure on private enterprises and SMEs in financing, which is the key factor causing the recent sharp fluctuations in the market. The liquidity risk of equity pledge and other high risk points are highlighted, and local financial risks have the tendency to spread into regional and systematic financial risks.
Under the complex background of simultaneous effects of domestic and foreign factors, this report introduces financial catastrophe risk indicators (CATFIN), systematic expected loss (SES), conditional value at risk (△ CoVaR) and systematic risk indicators (SRISK), and measures China's systematic financial risk level and judges the operation of the real economy in combination with open macroeconomic data, The purpose is to provide scientific reference basis and suggestions for identifying, monitoring and resolving local high-risk points, preventing systemic financial risks and alleviating downward pressure on the real economy in this complex situation.
Measurement of Systematic Financial Risk Level in China's Financial Market
1. Macro level: The financial catastrophe risk index (CATFIN) rose sharply in the short term, but did not break the long-term risk alert threshold.
Compared with the long-term historical trend (2006/06~2018/10) (Figure 1), the Catastrophe Risk Index (CATFIN) of China's financial system has an upward trend in recent years, but does not touch the risk alert threshold calculated based on long-term data. The continuation of Sino US trade friction, the reform of domestic financial industry and the release of some risk points have brought panic to the market. The Central Committee of the Communist Party of China, the State Council and the regulatory authorities have actively responded and issued a series of policies in time to stabilize the market. China's financial market is less likely to have systemic financial risks in the near future.
According to the data collected after 2015, the financial catastrophe risk index (CATFIN) increased sharply at the end of October, breaking through the short-term risk alert threshold, reaching the level of the abnormal fluctuation period of the stock market in 2015, but then quickly fell back to below the alert threshold, which temporarily did not form a sustained high-risk range. This deserves the close attention of the regulatory authorities and early prevention. The continuation of high-risk periods will intensify the transmission and diffusion of risks and cause substantial damage to the financial market and the real economy.
Macroeconomic data at this stage remained stable on the whole, and some indicators declined slightly. The gross domestic product (GDP) in the third quarter grew by 6.5% year-on-year, slightly lower than that in the first and second quarters (6.8%, 6.7%); The consumer price index (CPI) rose slightly in the third quarter, reaching a half year high of 2.5% in September; The average value of industrial added value (year-on-year) in the third quarter was 5.97%, lower than 6.33% in the same period last year. The leading purchasing managers' index (PMI) of China's manufacturing industry recorded 50.2% in October, the lowest value this year, down 2.7% year on year; In October, the non manufacturing business activity index was 53.9%, which also reached the lowest value this year; The average value of completed fixed asset investment (cumulative year-on-year) in the third quarter was 5.40%, far lower than 7.87% in the same period last year. The decline of some forward-looking indicators reflects that China's real economy is under great downward pressure at present.
2. At the micro level: several systemic financial risk indicators have recently reached new highs.
This report calculates the micro systematic risk indicators of all financial institutions (57 in total) that have been listed for more than one year: systematic expected loss (SES), conditional value at risk (△ CoVaR) and systematic risk indicators (SRISK), and conducts sub sample analysis on them according to three industries: banking, securities and insurance.
From the overall sample, the total value of SES has reached the highest value in history, and the total value of SRISK has also approached the historical peak, which indicates that the financial industry as a whole is facing greater risks in the near future. From the perspective of three sub samples by industry, the trend of the three indicators shows that banking financial institutions have the largest marginal contribution to systemic financial risk, and their systemic risk indicators have the most obvious upward trend. This is consistent with the basic characteristics of China's financial industry. The indirect financing of banks is still the main financing channel of China's economy, and the size of banking institutions and the depth and breadth of their participation in economic activities are far greater than those of securities companies and insurance companies, which leads to the largest negative impact on the banking industry when internal and external shocks arrive. At present, the key prevention object of China's systematic financial risks should still be the banking industry.
The absolute value of comparative indicators by industry is not enough to provide sufficient reference information for the identification, monitoring and resolution of high-risk points. Due to different business focus, business style and equity structure, each institution has different degrees of impact and ability to withstand risks in the face of shocks The three subsamples of joint-stock banks and urban commercial banks are measured and analyzed in more detail. The marginal contribution of systematic financial risk of state-owned banks has jumped sharply for many times this year, and its SES value reached its historical peak at the end of October (Figure 2). The marginal contribution of systemic financial risk of joint-stock banks rose more significantly, and their SRISK value and SES value reached a new historical peak at the end of October at the same time, both breaking the level of the abnormal fluctuation period of the stock market in 2015.
According to the trend of non-performing asset growth, capital adequacy ratio, asset profit rate and other data of the banking industry, the banking industry's operating and financial conditions have not deteriorated significantly in the near future. It can be inferred that the jump in the stage of systematic financial risk indicators is still "event driven", It comes from the panic and pessimistic expectations in the complex environment under the joint action of internal and external factors.
From the perspective of banking institutions' ability to resist risks, the expected capital loss coverage of state-owned banks and urban commercial banks is more than 100% in the near future, while that of joint-stock banks is less than 100%. This shows that the risk resistance of joint-stock banks is lower than the industry average, and is a weak link of banking institutions and even the entire financial market.
An Analysis of the Causes of High Stage Volatility in Financial Market
The causes of the high periodic volatility of China's financial market in the near future are comprehensive, including the impact of the uncertainty of the international environment, as well as the highlighting of domestic cyclical and institutional problems. This paper discusses the factors that have the deepest impact and need to be solved urgently.
1. Impact from international environment.
Since 2017, the economy of major developed countries and regions in the world has recovered well, and the United States, the euro area, Japan and other countries and regions have recorded striking data in terms of economic growth, employment levels, price levels, etc. Emerging economies have also maintained overall rapid development, but they are generally under the pressure of cross-border capital flows caused by economic transformation and monetary tightening in developed economies, and they still face greater uncertainty in the future.
The combination of "tight monetary" and "loose fiscal" policies of the United States has produced spillover effects on the global economy and financial markets. The Federal Reserve raised interest rates three times in March, June and September this year, making its target interest rate reach the highest value of 2.25% in nearly a decade, which reflects the positive expectation of the Federal Reserve for the future development of the U.S. economy. The "tax reform" plan adopted by the US Congress in December 2017 will significantly reduce corporate income tax and slightly reduce individual income tax, which will promote investment and consumption to a certain extent. The combination of "tight currency" and "loose finance" policies is expected to boost the yield of assets denominated in US dollars and attract the "return" of global capital. Driven by market factors, the RMB exchange rate continued to depreciate, and the central parity rate of the US dollar against the RMB once exceeded the 6.97 threshold. Although it strengthened the competitiveness of Chinese goods in the international market, it also increased the risk of capital outflows.
The negative impact of the uncertainty of Sino US trade prospects on China's foreign trade began to emerge. Since September 24, the United States has officially imposed 10% import tariffs on 5745 items of about $200 billion worth of goods originating in China. In October, China's manufacturing and non manufacturing PMI were 46.9% and 47.80% respectively in terms of new export orders, far below the boom and bust line. Considering the production cycle and existing inventory of enterprises, as well as the time required to find alternative raw material suppliers, the real impact of trade friction on the economy will lag behind. According to the Central Bank's calculation, the impact of the amount of tariffs imposed on China US trade friction on China's GDP growth is between 0.2% and 0.5%, which is not huge in absolute terms. However, considering that China's economy has changed from high-speed growth to medium high-speed growth, the impact of trade friction has been considerable.
2. China's private enterprises are under obvious pressure in the context of deleveraging.
Since 2018, China has achieved remarkable results in deleveraging, and the speed of credit expansion has slowed down. In the third quarter, the loan balance of financial institutions increased by 13.20% on a monthly basis, similar to 13.17% in the same period last year. In the third quarter, the monthly average growth rate of social financing scale stock was 10.75%, far lower than 14.50% in the same period last year, and the growth rate in September was 10.60%, the lowest since this year.
Under the background that China's economy is dominated by bank financing, and the bank risk control system is based on the financing conditions of large state-owned enterprises, private enterprises and small, medium-sized and micro enterprises are vulnerable in the demand side of financial resources. Compared with large state-owned enterprises, private enterprises and small and medium-sized micro enterprises are usually difficult to meet the mortgage and pledge standards proposed by bank risk control. The liquidity squeeze further aggravates the problems of private enterprises and small and medium-sized micro enterprises that are difficult to finance and expensive to finance. A number of data show that private enterprises and SMEs are under obvious pressure in the environment of deleveraging and strong supervision.
In October 2018, the PMI of large enterprises recorded 51.6%, although slightly lower than that of last month, it was still higher than the boom and bust line. The PMI of medium-sized enterprises fluctuated from boom to bust, reaching a new low of 47.7% in October since 30 months ago. The PMI of small enterprises was lower than the boom and bust line in most months of 2018, and climbed after a sharp decline at the beginning of the year.
The China Business Condition Index (BCI), which mainly surveys the operating conditions and environment of private SMEs, reached a historical low of 41.36% in October, far lower than 58.77% in the same period last year. Among its components, the enterprise financing environment index has been below 30% since July this year, and 25% in October, far below the boom and bust line. The continuous decline of China's enterprise operating condition index reflects the negative feedback of private entrepreneurs on the current business environment and their negative expectations of future development opportunities, especially the lack of financial support for them.
In the quarterly survey of loan demand conducted by the People's Bank of China, the loan demand index of large and medium-sized enterprises showed a downward trend in the second half of this year, but the index value of small enterprises rose significantly in the third quarter and reached the highest value of 67.10% in the past four years, far higher than the 56.30% level of large enterprises and 58.10% level of medium-sized enterprises. This directly reflects that small enterprises have the most urgent demand for loans.
The quarterly survey of entrepreneurs' confidence conducted by the National Bureau of Statistics shows that the prosperity index of state-owned enterprises and private enterprises has declined significantly in recent years, and the index of private enterprises is lower than that of state-owned enterprises, with a large decline.
The vigorous development of private enterprises and small and medium-sized enterprises is an indispensable force in China's economy, as well as a key link in achieving supply side reform and high-quality growth. The lack and insufficiency of loan support and financial services for private enterprises and small and medium-sized micro enterprises will directly lead to the slowdown and decline of the macro-economy, and undoubtedly will also lead to substantial shocks in the financial market.
3. Liquidity risk of equity pledge.
The impact of equity pledge on the financial market is pro cyclical. When the stock market rises as a whole, the equity value provided by the pledger is high and more funds are raised, which will further promote the market upward; When the stock market falls as a whole, the value of pledged equity will decline, which may lead to large-scale closing positions, a vicious spiral decline, and even the depletion of corporate liquidity and bankruptcy, which is a potential source of systemic financial risks.
Compared with the probability distribution of equity pledge ratio at the end of October 2018 and the same period last year (Figure 3), the distribution function shifted significantly to the right, indicating that the number of stocks with high pledge ratio increased significantly. The higher the pledge ratio, the more stocks with high pledge ratio, the stronger the correlation between stock prices, and more likely to trigger a chain reaction when the impact comes.
Since the beginning of 2018, China's A-share market has shown an obvious downward trend. Against this backdrop, the total market value of A-share pledge has also been shrinking, from 6.3 trillion yuan at the beginning of the year to 4.4 trillion yuan at the end of October. Contrary to this trend, the total number of shares pledged increased significantly, from about 570 billion shares at the beginning of the year to about 640 billion shares at the end of October. From the historical data, the trend of the total market value of equity pledge significantly deviated from the total number of shares in the middle of 2015 and the beginning of 2016 when the stock market fluctuated abnormally. Combining these two trends, it is not difficult to find that the average price of pledged equity has dropped significantly, and the decline in the value of pledged goods has greatly increased the possibility of forced closing of trading accounts when the market continues to dip, thus increasing the probability of causing a spiral decline.
The impact from the international environment, the difficulty in financing of domestic private enterprises, small and medium-sized enterprises, and the recently highlighted liquidity risk of equity pledge are all likely to become the trigger for China's systematic financial risks, which are high risk points that need to be solved and resolved at present.
Current policy path and suggestions
In response to several internal and external negative impacts represented by trade frictions, financing difficulties and equity pledge liquidity risks, the CPC Central Committee, the State Council and relevant departments actively responded, firmly grasped the principle of precaution in advance, and recently issued a series of policies to resolve the existing high-risk points and prevent the formation of new risk points, It protects the real economy and financial market.
Recent policies still adhere to the general tone of seeking progress in stability and firm reform, but in the face of new problems and new risks, the current policy flexibly changes its style in details, aiming to obtain the best policy effect with the smallest administration cost.
The Political Bureau of the CPC Central Committee analyzed the current economic situation and deployed economic work at the meeting on October 31. The meeting clearly proposed to implement positive fiscal policy and sound monetary policy, and also proposed to study and solve the difficulties encountered in the development of private enterprises and small and medium-sized enterprises. The People's Bank of China has implemented four targeted RRR reductions since this year, and plans to work with relevant departments to adopt a policy combination of "three arrows" of credit support, bond financing and equity financing to support private enterprises to broaden their financing channels. The CBRC has initially considered setting the policy goal of "One Two Five Year Plan" for financial institutions in the banking industry, so that the financial resources available to the private economy match its proportion in the national economy. At the end of October, the CSRC issued the Administrative Measures for Private Asset Management Business of Securities and Futures Operating Institutions to improve the share repurchase system of listed companies, deepen the market-oriented reform of mergers and acquisitions, standardize asset management supervision, but relax some existing regulations to improve the efficiency of capital use. Local governments and enterprises have also recently set up rescue funds to defuse liquidity risks of listed companies and reduce corporate financing costs. The current policy has been issued in a timely manner, with appropriate intensity and rhythm, and effectively responded to the problems and risks faced by China's real economy and financial market in the near future.
Considering the current situation, this report puts forward the following suggestions from multiple dimensions along the path of the implemented policies:
On the basis of adhering to structural policies such as targeted RRR reduction and mortgage supplementary loan issuance, the Central Bank should be moderately loose at the overall level. The central bank can make the financial market and the real economy have reasonable and sufficient liquidity from the "market track" represented by open market operations and SLF, MLF and other tools and the "regulatory track" represented by benchmark deposit and loan interest rates and floating ranges. On the one hand, it helps to mitigate the liquidity risk of equity pledge and fulfill the responsibilities of the central bank as the lender of last resort. On the other hand, it can reflect the foresight of monetary policy and respond to the slowdown of economic growth in advance. The overall moderate easing is not equivalent to "flooding", but a comfort to the market and economy against the background of excessive deleveraging and strong asset management and governance in the early stage.
The regulatory authorities should stabilize the macro leverage ratio. For the private sector, they should follow the approach of "stabilizing first and then reducing", from passive to active, and gently and firmly reduce leverage; The central government should appropriately increase leverage to help it better implement positive fiscal policies. On the basis of adhering to the principle of "housing without speculation", the regulation of the real estate industry should be moderately relaxed, which can keep the loan to value ratio unchanged, and at the same time relax the interest rate and purchase restriction policies. It should be realized that the earlier we change the situation of over strict regulation of real estate, the more significant the pulling effect on the economy and the lower the cost of governance. The governance of the asset management industry should be moderate. Under the current industrial competition situation, bank credit can only first guarantee the credit demand of large enterprises and capital intensive enterprises. The development of asset management industry and other forms of shadow banks to a reasonable extent can make credit resources flow indirectly to private enterprises and small, medium-sized and micro enterprises that are relatively weak in the capital market, This is China's valuable experience in implementing the dual track reform since 40 years of reform and opening up.
We should also recognize that the formation of the high-risk period in this stage is inevitable, and it is the external manifestation of the cyclical and institutional problems accumulated in China's economy for a long time in the reform and transformation period. Whether the reform and opening up of China's economy can break through the tight encirclement and advance steadily is the key factor to restore investor confidence, stabilize the financial market and maintain high-quality economic growth. In terms of exchange rate policy, the control of cross-border capital flows should remain neutral, continue to promote the marketization of the exchange rate mechanism, and allow the exchange rate to fluctuate within a reasonable range. In terms of fiscal policy, we should reduce the expectation of its effectiveness, and gradually promote the reform of the tax sharing system to fundamentally solve the problem of local government financing.
(Author's unit: Research Center for Monetary Policy and Financial Stability, National Institute of Finance, Tsinghua University)
This article is excerpted from the Report on China's Systematic Financial Risk in October 2018 - Situation Judgment and Policy Suggestions in High Risk Period issued by the National Institute of Finance of Tsinghua University
Editor in charge: Li Feng
