The recent Annual Report on China’s Financial Development suggests China’s work in finance will prioritize stability in 2017.

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China’s work in finance will prioritize stability in 2017, according to the recently released Annual Report on China’s Financial Development.

The People’s Bank of China, China’s central bank, is expected to pay more attention to deleveraging and risk prevention, said Wang Guogang, chief editor of the report and director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences.

In regard to the development of banking in 2017, the report makes three predictions：First, the operating income of banking industry will drop further. Second, the non-performing loans ratio will continue to slightly increase, but the pressure will gradually decline. Last of all, the report suggests high attention should be paid to risks in the financial market.

As a result of insufficient demand for credit, banks generally possess more investment assets than loans in terms of asset allocation. And in some small banks, the situation is far more serious, according to the report.

This situation means that the major risks faced by banks have expanded beyond credit risk of loans to investment and market risk, which requires more attention to the risk brought by price fluctuations in the financial market, Wang said.

In response to the challenges posed by interest rate liberalization, listed banks have adjusted their asset-liability structure. In terms of assets, banks continue to purchase more investment assets, such as financial assets held for trading, financial assets available for sale and held-to-maturity investment, according to the report.

From the perspective of financial regulation, restoring the normal function and order will still be the core of China’s stock market policy in 2017. Judging from the previous cycle of market fluctuation, three or four more years will be needed before confidence in China’s stock market can be restored. The report suggests that the appreciation of the US dollar will also be an external factor disturbing China’s stock market in the future.

From the perspective of resident’s asset allocation, the report suggests real estate prices in China have fallen due to China’s adjustment and control policies. Residents’ money will flow more to assets other than real estate, which will be favorable for activating the stock market in the short term. However, in the mid to long term, the decline of prices in the real estate industry will present an obstacle to profit growth in all industrial sectors, which will depress stock prices, according to the report. 

“In the financial field, stability lays the foundation for various development and reform work,” Wang said, suggesting there are three noteworthy issues in China’s current monetary policy.

First, China’s monetary policy in 2016 was “prudent” and “moderately loose” while China will pursue a “prudent” and “neutral” monetary policy in 2017. It indicates a sense of tightening up.

Second, the mode of operational monetary policy was adjusted from money quantity to money price. The adjustment of interest rates of various new financial instruments will affect the demand of commercial banks and other financial institutions for central bank funds.
Last of all, China’s banks are predicted to grant new loans worth 13 to 14 trillion yuan in 2017. There will still be room to adjust the required reserve ratio. However, the room for adjusting the deposit-reserve ratio will be limited in 2017.