Fears about the stability of China’s economy in light of stock and currency fluctuations has prompted a Chinese government-backed think tank to warn of “potential financial panic”, according to a leaked document that began circulating late last week.
In the document, the Beijing-based National Institution for Finance & Development (NIFD) warned the world’s second-largest economy could be headed for danger as bond defaults, liquidity shortages and a recent plunge in financial markets take their place alongside increasing trade tensions with the United States.
The benchmark Shanghai Composite Index has fallen over 20% since January, leaving the country in a technical bear market. The index is at its lowest level since May 2016, having been at a two-year high earlier in the year.
The Chinese yuan has also suffered, losing over 6% since March to sit at its weakest level since late 2017.
“We think China is currently very likely to see a financial panic,” NIFD said in the document, which reportedly appeared online briefly last week before being taken down.
“Preventing its occurrence and spread should be the top priority for our financial and macro-economic regulators over the next few years.”
The leaked information warned that leveraged purchases of shares have reached levels not seen since 2015 when a market crash erased A$6.7 trillion off Chinese equity values.
“We failed to clean up the leveraged funds after the 2015 market rout; they have staged a comeback in a new guise,” NIFD said.
The document outlined that China should be ready to introduce a mix of fiscal and financial sector measures to avert a systemic crisis and, in the event that a major default roils markets, authorities should be ready to step in with financial support.
“China’s State Council should be ready to implement any market support measures in co-ordination with the central bank and other regulators, key government ministries and the police,” the NIFD added.
Impact on Australia’s economy
If China experiences the NIFD’s predicted “financial crisis”, experts say the fallout will hit global markets by way of a sharp turndown in economic growth.
Australia, which last financial year sent almost a third of its merchandise exports – including more than A$50 billion of iron ore – to China, will be one of the countries most affected.
A crisis would impact everything from metals prices and tourism flows to education exports.
“Among the largest economic risks Australia faces is something going wrong with China,” Reserve Bank governor Philip Lowe told a forum at the Australia-China Relations Institute in Sydney recently.
“China is not only the main destination for Australia’s iron ore and coal but [it has] become the largest destination for a range of food and service exports.
“Chinese tourists account for one quarter of all the tourist dollars spent in Australia, and Chinese students for one third of all education exports.
“[Our] service exports to China exceed those to the United States and Britain combined.
“Not surprisingly, addressing this [financial panic] risk has become a priority of the Chinese authorities.”
Dr Lowe said is too early to tell whether authorities will be successful in managing the transition from a growth model heavily-dependent upon the accumulation of debt to one where credit is less central.
“It is a very significant task,” he said.
“The experience of other countries suggests caution and, elsewhere, there have been serious accidents along the way.
“We all have a strong interest in their efforts being successful.”
Dr Lowe said a stable and robust Chinese financial system was in Australia’s best interests.
“As the economic relationship between our two countries broadens and deepens, developments in China are having a material impact on more and more Australian industries,” he said.
“It is important that we have a thorough understanding of one another.”
But he cautioned about becoming overly concerned about the Chinese economy.
“[The Chinese authorities] are addressing the vulnerabilities of the financial system before the problems actually arise,” he said.
“There has been a move towards transparency in their financial sector, the Chinese government have been very clear about their agenda and officials are being more open about discussing the issues.
“There is more work to be done but [they are] moving in the right direction.”