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China's central financial institution warns of monetary dangers, together with attainable defaults

People walk past the headquarters of People's Bank of China (PBOC), the central bank, in Beijing, China on September 28, 2018.

Jason Lee | Reuters

BEIJING – China's central bank on Thursday warned of financial risks in the country that have accumulated over the years, as well as shocks from overseas uncertainties.

These risks include "oscillations" in the stock and bond markets and possible defaults on bonds in real estate companies, said Zou Lan, director of the financial markets division of People's Bank of China.

The detailed comments mark the recent warning from high-level officials in China in the past few weeks of domestic market risk. The Shanghai Composite barely changed over the year, while the S&P 500 rose more than 5%

The coronavirus pandemic and the high volatility of international capital flows have also shocked the domestic financial market, Zou told reporters.

The risk of failure is "quite high".

"The equity, bond and commodity markets are exposed to risk of oscillation," he said, according to a CNBC translation of his Mandarin remarks. "A small number of large groups of companies are still at risk, medium and low quality companies are still facing funding difficulties, and the risk of default is quite high."

Zou added that the pressure from rising property prices is relatively strong in some "hot" cities, and the potential for default and other risks is worth seeing for highly indebted medium and small real estate companies.

The Chinese government announced last month that it would target GDP growth of over 6% this year. Many economists said the conservative target gives policymakers the ability to tackle long-term issues such as debt build-up.

According to a report by Allianz, China's debt ratio rose from an average of 251% between 2016 and 2019 to 285% at the end of the third quarter of 2020, citing the analysis of its subsidiary Euler Hermes.

Among the signs that authorities have begun to look seriously at domestic risk, some state-owned companies have defaulted over the past year – very rare for companies that investors believed had implicit government support.

But in the real estate market, Beijing has tried to limit speculation. According to Reuters, new home prices rose in February to their highest level in five months.

People's Bank of China officials at Thursday's press conference claimed that monetary policy would remain stable and supportive. Zou did not provide specifics on how the financial risks he cited should be addressed.

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