New fund to strengthen financial safety net and smooth market meltdowns

SHI YU/CHINA DAILY

China’s national financial stability fund has accumulated some capital with its initial framework established, marking a critical step for the country to strengthen its financial safety net against growing global financial fragility, experts said on Tuesday.

“At present, the fund to ensure financial stability has established a basic framework in a preliminary manner and has accumulated some capital,” the People’s Bank of China, the country’s central bank, said in an article released Monday. .

Financed by market participants, including financial institutions and financial infrastructure operators, the fund aims to accumulate the capital needed by central government to deal with major financial risks and will be used when other sources of capital are faced. to deficiencies in managing said risks, the PBOC said.

In other words, financial institutions, as well as their actual shareholders and controllers, local governments, deposit insurance funds and relevant industry funds, should make full use of their resources to resolve material financial risks in accordance with their responsibilities. and in accordance with the law. If there is still a funding gap, the national financial stability fund will be used after approval, the central bank said.

China’s draft financial stability law, released in April, proposes the establishment of a national fund as reserve capital to manage major financial risks and allows the PBOC to provide liquidity support to the fund if needed. The fund had raised 64.6 billion yuan ($9.02 billion) in May, the China Banking and Insurance Regulatory Commission said.

China’s efforts to set up the fund are in line with international practices for warding off financial crises, experts said, adding that the fund should only be used to defuse major financial risks, instead of smoothing fluctuations. market normals.

Huang Wentao, chief economist at China Securities, said his team expects the national financial stability fund to raise about 120 billion to 180 billion yuan a year, to secure sufficient capital to manage financial risks. significant potential.

Taking similar funds in developed economies as a benchmark, Huang said there is scope for China’s national financial stability fund to consider setting a cap on its funding and developing a money-sharing mechanism. information for risk monitoring and early warning purposes.

Dong Dengxin, director of the Institute of Finance and Securities at Wuhan University of Science and Technology, said the fund can help stem the spread of risk in the initial stage of any potential financial crisis by smoothing fluctuations. market and bailing out troubled financial institutions.

The central bank article adds that the country’s financial risks have been mitigated and are at a controllable level, with 98.9% of banking sector assets rated safe by the PBOC rating system at the end of the year. 2021, indicating the robustness of the functioning of financial institutions.

Shadow banking risks have diminished, the article says, as 87% of the country’s asset management products became net worth products that do not guarantee investors a specific return as of late June, rising by 41 percentage points compared to the end of 2018. .

The PBOC will further strengthen the regulatory basis for financial stability, defuse risks among major business groups and financial institutions, and deepen financial institution reforms to improve corporate governance, according to the article.

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