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Beijing seeks to avoid ‘black swan’ financial market disruptions as trade war fears rise

Top financial regulators say country must fine-tune monetary policy so there is enough liquidity to manage economy amid growing challenges

Amanda Lee UPDATED :

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Chinese financial regulators have met again to discuss growing concern about surprise events, such as a sharp escalation in the trade war with the United States, that could severely damage China’s financial markets.

The discussion of what to do to avoid “black swans” that could cause major disruptions was made at the latest meeting of the Financial Stability and Development Committee (FSDC), the agency coordinating financial regulation chaired by Vice-Premier Liu He, according to a statement on Monday.

The meeting, which took place on Friday, also concluded that China must fine-tune monetary policy to maintain ample liquidity in financial markets to manage its economic and financial situation in the light of escalating challenges posed by the trade war.

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It comes less than a week before the 10th anniversary of the collapse of the Lehman Brothers securities firm that precipitated the worse financial crisis since the 1930s.

China must “prevent all kinds of ‘black swan’ events to maintain a healthy development of stock, bond and exchange rate markets”, according to the statement, referring to a term popularised by Nassim Taleb early this century to describe surprise events that cause significant disruptions.

The agency coordinating financial regulation, chaired by Vice-Premier Liu He, discussed what to do to avoid “black swans” at a meeting on Friday. Photo: AFP

It was the third meeting of the FSDC in the last 100 days, reflecting Beijing’s heightened alertness to financial volatility as Trump’s trade war escalation and financial turmoil in a number of emerging markets, particularly Turkey and Argentina, started to erode investor confidence. Members of the FSDC include Yi Gang, governor of the People’s Bank of China, and Guo Shuqing, head of the China Banking and Insurance Regulatory Commission.

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But market disruptions can be hard to anticipate, Zhou Xiaochuan, Yi’s predecessor at the Chinese central bank, said in an interview with CNBC on Friday.

Zhou said the direct impact of US tariffs would be manageable for Beijing but he warned about dangers from a quick shift in mood in the markets. “We saw when the Lehman Brothers event happened – there was sudden panic and contagion, so this kind of thing is not very easy to analyse,” he said in the interview in English.

The trade war was a “major reason” for the slump in Chinese stocks in recent months, Zhou said. China’s benchmark stock market index has lost about 20 per cent of its value so far this year.

Samuel Tse, an economist with DBS, said investors had already started to price in mounting risks, increasing Beijing’s concern about a “black swan” event.

“Investors are pessimistic about the outlook for Chinese stocks,” Tse said. “The US will also take a blow if the trade war gets worse but China will be hit much harder … just think about what would happen if the US decides to stop selling [semiconductor] chips to China, which is totally dependent on [US supplies].”

Zhou Hao, senior emerging markets economist at Commerzbank, predicted Beijing would act if it saw risks rising sharply but warned that its interventions in the past had not always worked well.

“I think the black swan events they are referring to are the classic systemic crises that may have a contagion impact [on the financial system],” Zhou said. “I don’t think that the contagion effect is bigger now compared to before [in spite of the escalation of the trade war].”

But Chinese authorities would use forceful measures if they felt the need to protect the financial system, Zhou said. “Yes, the economic data isn’t all that good but we know that China has a strong record of intervening in markets [in an effort to control risks]. But it is not always very effective.”

Beijing adjusted its policy this summer to focus on stabilising growth at home by speeding up infrastructure investment, although China’s headline economic growth rate was still 6.7 per cent in the second quarter.

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The authorities have also encouraged banks to roll over their loans to local government financing vehicles and to purchase local government bonds, to boost financing for infrastructure projects and offer a financial lifeline to many vehicles that otherwise would be struggling to repay debts on time.

China successfully stepped up its efforts to defend the yuan from weakening beyond 7 against the US dollar, including redeploying its controversial “counter cyclical factor” to calculate the midpoint of the daily range in which the yuan is allowed to trade. China’s onshore stock market slipped to within 50 points of its 2016 closing low on Monday, continuing a slow motion decline this year rather than the sharp swings seen during the stock market rout in 2015.

According to the government statement on Monday, the policy tweaks have successfully ensured the “stable operation” of China’s credit, bond and stock markets while “keeping the yuan exchange rate at a reasonable and stable level”. The yuan has weakened about 5 per cent against the dollar this year, but it has stabilised over the last month and performed much better than other emerging market currencies.

The yuan has weakened about 5 per cent against the dollar this year. Photo: AFP

China will continue to “fully consider the economic and financial situation and the new changes in the external environment”, making necessary policy changes, according to the statement.

Exacerbating the trade tension, China reported on Saturday that its trade surplus with the US rose 10 per cent in August to US$31 billion, making it more likely that US President Donald Trump will go ahead with a plan to impose tariffs on an additional US$200 billion of Chinese imports. China has promised to hit back with duties on US$60 billion of US imports. The US and China have already levied 25 per cent tariffs on a total of US$50 billion of each other’s goods.

On Friday, Trump threatened to impose tariffs on yet another US$267 billion of Chinese goods if Beijing did not offer more concessions.

Low-level trade talks between the US and China last month yielded no breakthrough.

China has redoubled efforts to woo investors to offset the effects of the trade war. Chinese Premier Li Keqiang met ExxonMobil chief executive Darren Woods in Beijing on Friday to discuss the company’s plan to build a US$10 billion chemical plant in Guangdong and Li publicly assured Woods that China would protect foreign interests in China.

According to the Financial Times, China has invited executives of top Wall Street banks such as Goldman Sachs, Morgan Stanley and JPMorgan to meet in Beijing to attend a “China-US Financial Round Table” on Sunday.

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