China central bank wants "healthy" stock market, warns of debt risk

[BEIJING] China's central bank said on Friday it wants to see a "healthy" stock market, a day after surging Chinese shares slumped 6 per cent in record trading volume as investors fled tighter borrowing rules.

In its 2015 financial stability report, the People's Bank of China (PBOC) warned of a slowing economy and rising debt levels, but repeated its vow to deepen China's nascent financial market through reforms.

The PBOC said in the report released online it was monitoring widely-recognised financial risks in the world's second-biggest economy, including heavily-indebted local governments and a slowing real estate market.

It did not address the dangers of China's soaring shares, saying only that it wishes to promote a "stable" bourse. Chinese stocks have zoomed up 140 per cent in the last 12 months.

"We will promote stable and healthy development of the stock market, and continue to expand the main board and the small-and medium boards," the PBOC said, adding that there are plans to set up a new board on the Shanghai stock exchange.

Chinese stocks, which ended flat on Friday after a volatile session, skidded earlier this week as more brokers tightened margin trading requirements and as the central bank drained cash from the money market.

There are worries that China's buoyant stock market is being powered by its looser monetary policy, at the expense of small businesses which are grappling with high real interest rates and a shortage in loans.

Even though the PBOC has cut interest rates three times in six months to stoke growth in China's stuttering economy from a six-year low, real interest rates in China are still over 3 per cent, Morgan Stanley said in a report this month.

That is well above real rates in Japan, Europe and the United States, where borrowing costs are negative, the investment bank said.

The PBOC acknowledged the problem of high borrowing cost in China, saying it would lower interest rates in a "targeted"fashion, but did not elaborate.

"Downward pressure on the economy is increasing," it said. "Some economic risks are showing up, and the overall debt level is still climbing."

It repeated its stance on monetary policy, saying it would be neither too tight or too loose, and would be "fine-tuned" when appropriate.

A slowing housing market and sluggish exports, domestic investment and consumption have dragged on economic activity.

The economy grew 7 per cent in the first three months of the year. Analysts widely expect full-year growth to come in at 7 per cent this year - the weakest in a quarter of a century.


BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to