The trade war between the United States and China — the two largest economies in the world — officially started last week. Yet even before both countries began imposing tariffs on each other’s goods, China’s financial markets had been experiencing serious fluctuations. Faced with such a gloomy market outlook, Chinese financial authorities repeatedly vowed that China will “resolutely prevent systemic financial risks.”
So far, China’s currency and stock market have been under considerable pressure.
The Shanghai Stock Exchange Composite Index (the index of all stocks traded at the Shanghai Stock Exchange), for example, dropped from 3,200 points in late May to nearly 2,700 points now.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
On July 2, the Chinese renminbi (RMB) fell through psychologically significant 6.7 mark against the U.S. dollar, hitting its lowest point in almost a year.
Also on July 2, China re-established the Financial Stability and Development Committee, which comprises all Chinese top financial officials, such as Liu He (Chinese President Xi Jinping’s top economic adviser), Yi Gang (governor of China’s central bank, the People’s Bank of China) and Guo Shuqing (chairman of the China Banking and Insurance Regulatory Commission).
According to Xinhua, the top priority on this committee’s agenda is to “make a deployment to win big risk control battles.”
The committee has made a “three-year action plan,” which involved promoting financial reform and opening up, keeping monetary policy stable and neutral, and maintaining reasonable and sufficient liquidity in financial markets.
Xinhua emphasized that the committee was “fully confident” that China has “favorable conditions to win big risk control battles and tackle external risks.”
On the same day, Shanghai Stock Exchange held a cadre meeting, urging all the staff to “firmly hold the bottom line of no systematic risks, with a iron-like strong will.”
On July 3, the People’s Bank of China published an interview with Governor Yi Gang on the recent foreign exchange market situation. He said that the fluctuations of the RMB “are mainly affected by the strength of [the] U.S. dollar and external uncertainties,” while China’s “overall financial risks are under control.”
“We will continue the sound and neutral monetary policy…and keep the RMB exchange rate generally stable at an adaptive and equilibrium level,” he added.
On July 5, Guo Shuqing also had a rare interview with Chinese media, where he particularly discussed the trade war with the United States as well as China’s economy.
“The fight against China’s foreign trade and investment is largely a blow to multinational enterprises, including many U.S. businesses. The trade war is doomed to failure in the end,” Guo said. “In the past 40 years, the development of China’s society and economy has encountered many difficulties and problems, but as long as we uphold the leadership of the Communist Party and reform and opening up, we can surmount all challenges.”
While the trade war is getting all the attention and the blame for the financial sector uncertainty, experts have long warned of the potential for upheaval. In late 2017, before his retirement, Zhou Xiaochuan, the former governor of the People’s Bank of China, had already publicly warned about China’s systemic financial risks on various occasions.
As The Diplomat noted previously, Zhou even wrote a lengthy article explaining China’s systemic risks with an unusually harsh tone. He wrote:
China’s financial sector is and will be in a period with high risks that are easily triggered. Under pressure from multiple factors at home and abroad, the risks are multiple, broad, hidden, complex, sudden, contagious, and hazardous. The structural unbalance is salient; law-breaking and disorders are rampant; latent risks are accumulating; [and the financial system’s] vulnerability is obviously increasing.
Now, those systematic financial risks, as Zhou had predicted, appear to loom large on the horizon.