Monetary authorities stress on financial stability

Monetary authorities have once again reiterated the need to maintain financial stability and prevent potential risks arising from areas such as the foreign exchange market and imported inflation, while keeping the renminbi exchange rate basically stable.

The renminbi exchange rate has remained basically stable at a reasonable and balanced level so far this year and authorities will strive to maintain it, a senior central bank official said on Sunday.

Liu Guoqiang, vice-governor of the People's Bank of China, the central bank, said two-way fluctuations, either appreciation or depreciation, will become the norm in the future, with the exchange rate continuing to depend on market supply and demand as well as changes in global financial markets.

The current exchange rate regime is suitable for China at present and in the future, Liu said.

Zhang Xiaohui, former assistant to the Chinese central bank governor and dean of the PBC School of Finance of Tsinghua University, said China should pay attention to the monetary policy changes in developing countries as these may have short-term effects on the domestic financial system.

"We should keep a close watch on inflation in global asset prices, and the related overleverage, as well as financial instability," Zhang said. Excessive investment in some areas due to the rising structural inflation could be another risk, she said.

Monetary authorities have often cited the need for stabilizing prices and maintaining financial stability and said it was necessary to improve the macro-prudential policy to address systemic risks.

Macro-prudential policy is not a new concept for central bankers. It became popular during the 2008 global financial crises, when it became evident that risk prevention should focus not only on a single financial institution or a single sector, but also on systemic risks, according to experts.

It also requires building a full-range financial risk monitoring and warning system, especially to supervise activities of adding leverage, debt, and financial cycles, Li Bo, vice-governor of the PBOC, said at a forum on Saturday.

The PBOC is also planning to establish targeted policy tools and include influential financial activities, financial institutions, financial markets and related infrastructure in the macro-prudential management system. Foreign exchange rate policy is also included in the framework.

The central bank will further optimize the financial regulatory framework, consider further clarifying and separating the prudential supervision function and behavioral supervision function of regulatory authorities, Li said at the forum held by the PBC School of Finance of Tsinghua University.

Identifying the targets and responsibilities for prudent regulation is a key part of China's financial regulatory reform in the next stage, said Li.

Richard Apostolik, president and CEO of the Global Association of Risk Professionals, said that China has made risk management a priority for the financial services industry and has "been very clear about this priority."

"Recognizing the importance of risk management at the most senior levels of the government embeds it into the country's corporate psyche, from the most junior to the most senior levels in an organization, and will help reduce or avoid negative outcomes while building a solid foundation for rapid and continued growth," said Apostolik.

The Financial Stability and Development Committee under the State Council has called for maintaining a prudent monetary policy and making it flexible and appropriate to better serve the real economy.

Credit policy, in the meantime, should be targeted and match the needs of market entities, while maintaining adequate and reasonable liquidity, it said at a meeting.

The meeting was chaired by Vice-Premier Liu He, who is also head of the regulatory committee. The statement highlighted preventing financial risks, especially in promoting reforms in small and medium-sized financial institutions to reduce credit risks. Regulation of the financial activities of platform enterprises should also be strengthened. The financial regulatory body also warned of overseas shocks, urging the need to deal with imported inflation and enhance expectation management with well-prepared policies.