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Zhou Xiaochuan, the governor of the People's Bank of China, warned that the country's financial system is becoming increasingly more vulnerable due to high leverage and also called for tighter regulation.
In an article published on the central bank's website, Zhou said that the threats to the financial system are building up, including those are that are “hidden, complex, sudden, contagious and hazardous.”
He called for the country to toughen regulation and allow markets serve the real economy at a better rate. He also suggested that the government open markets by loosening capital controls and easing some restrictions on foreign financial institutions that want to operate in China.
Zhou singled out high leverage as the main source of macro financial vulnerability. He said that this is reflected as excessive debt in the economy and as bloated credit in the financial system.
There is speculation in the market that the recent string comments from the PBOC conceived as pro-deleveraging contributed to a rout in Hong Kong shares. The essay by Zhou is considered as the latest indication that policymakers continue to be committed to the initiative to lower borrowing levels across the economy.
But on Monday, the essay seemed to be dismissed by the Chinese bond traders. Meanwhile, the Hang Seng Index posted its biggest drop in two weeks while the Shanghai Composite Index declined for the third consecutive day.
