China's Financial Risks in the 13th Five-Year Plan

China's economy and financial system face a great many challenges this year. For the financial system,in my opinion,they fall in the following areas:

First,there are issues concerning confidence and market expectations. Confidence is especially important but for some investors,confidence in China's economic and financial soundness has been badly shaken.

Confidence comes not only from positive government efforts to stimulate the economy. It requires transparency and credibility regarding policies. Improved macroeconomic indicators are also important,particularly after the economy appears to have bottomed out. If there is no solid turnaround after a bottom has been reached,expectations can hardly reach a clear turning point.

Second,there are exchange rate and capital flow problems. What is the appropriate level for a nominal exchange rate? What shifts in capital flows are taking place? Making appropriate policy decisions based on this information requires strong professional skills and practical experience. If we look back at the experience of the renminbi's nominal exchange rate during the Asian financial crisis and the subprime crisis,and we consider that the Chinese economy is now at a critical stage,it appears to be more appropriate if we ensure a relatively stable nominal exchange rate and maintain a framework of strict capital management. Meanwhile,we need to control the effective exchange rate in a reasonable range with the help of foreign trade,tax and fiscal policies as well as other tools. In other words,exchange rate and capital management policy changes should be conducive to reducing excess capacity,cutting inventories and lessening leverage in the economy while lowering costs to businesses.

The third aspect concerns the real estate sector,and that calls for reducing inventories to lower financial risks. At present,China's real estate sector has attracted huge amounts of investment as well as the financing needed to pay for this. It is estimated that personal mortgage loans,housing provident fund loans and enterprise development financing have reached a combined 32 trillion to 35 trillion yuan. More importantly,when banks lend to enterprises,factories or office buildings are frequently used as collateral. Therefore,the reduction of inventories in the real estate sector will be a key factor in determining whether systemic risks can be kept under control. 

As for the financial risks related to real estate,some of them are contained within the financial system,but there also are even greater risks elsewhere. Real estate financing has remained generally steady,and if inventories can be reduced gradually,we can achieve a soft landing in the real estate sector. However,it is vital that we do not have any dramatic policy changes - such as the introduction of a property tax,inheritance tax or other fees as we move ahead with this effort. The scale of affordable housing construction and slum clearance projects needs to be appropriate if we wish to avoid new shocks to the real estate sector.

China's stock market has undergone a great deal of volatility since 2015,bringing along many additional risks for the financial system. At present,a new challenge is the shift away from the old practice of guaranteed repayments in the debt market. (Compa