Members of the Financial Stability China Financial Stability Report 2017 Analysis Group of PBC Chair: FAN Yifei Members: JI Zhihong LI Bo LIU Xiangmin LU Lei RUAN Jianhong SHAO Fujun WAN Cunzhi WANG Yuling XIE Zhong XU Zhong YANG Weizhong YAO Qian YU Wenjian ZHU Jun Steering Group SHI Yaobin FAN Yifei WANG Zhaoxing JIANG Yang CHEN Wenhui China Financial Stability Report 2017 Contributors to This Report Chief Editors: LU Lei KUANG Xiaohong HUANG Xiaolong TAO Ling Editors: KUANG Xiaohong HUANG Xiaolong ZHANG Tiantian Authors: Chapter I: LIU Tong BAI Xuefei WANG Yifei ZHAO Yaqi Chapter II: SUN Yinhao MA Zhiyang FU Jinghui ZHOU Yihai HU Jing GU Shiping SHAN Manyu WANG Lei LIU Ke Chapter III: CHEN Jianxin ZHAO Min ZHAO Bingzhe DING Hongtao LOU Dan HONG Bo WANG Wenjing Chapter IV: MENG Hui LI Minbo XU Yue MO Yiyi WU Yingxiao Chapter V: WANG Shaoqun CHEN Min LIU Liu Chapter VI: MENG Hui LI Minbo XU Yue MO Yiyi WU Yingxiao SONG Weiwei LI Jianyun LI Xinyang SUN Dan Chapter VII: SUN Yinhao DONG Jin TAN Jinghui XU Kaiyan LIU Shiying XIONG Chenchu XIA Weiliang WANG Tiandu TONG Yuenan Chapter VIII: LIU Tong ZHAO Bingzhe LIU Liu HU Ping REN Qiuyu OUYANG Xipeng XU Wei YANG Jun XU Xin Special Topic I: XIE Dan LIU Jie HU Ping REN Qiuyu LI Yan Special Topic II: OUYANG Changmin SUN Bin ZHANG Wan Appendix: LIU Tong ZHAO Pengfei WANG Xutao China Financial Stability Report 2017 LIU Liu MO Yiyi WU Yingxiao Other Contributors: CHEN Jiyong GUO Dayong JI Jun LIU Qian LIU Xiangdong MA Junwei REN Di SUN Hao SUN Sha TANG Tao WANG Dabo WANG Youxin WANG Zunzhou XIONG Qiyue YU Mingxing ZHANG Xiaolei ZHENG Heng ZHU Chunguang China Financial Stability Report 2017 ① Contributors to English Edition Chief Editors: LU Lei KUANG Xiaohong Editor: ZHANG Tiantian Translators: Executive Summary: CAO Zhihong Chapter I: LIU Tong Chapter II: MA Hui Chapter III: ZHAO Bingzhe Chapter IV: MA Hui Chapter V: FENG Lei Chapter VI: LU Leilei Chapter VII: LIU Hongcheng Chapter VIII: LIU Tong Special Topic I: FENG Lei Special Topic II: LIU Qin Appendix: SUN Yinhao Other Contributors: CHEN Min HU Ping LIU Jie ① This English edition is an unofficial translation of the China Financial Stability Report 2017, which was published in July 2017. In case of any discrepancies, the Chinese version shall govern. Executive Summary In 2016, the world economy recovered slowly. Advanced economies faced multiple political and economic challenges. The growth of emerging market economies stabilized but they were under structural adjustment pressures. The Chinese government continued to follow the overall principle of seeking progress while maintaining stability. Performance of the Chinese economy featured moderating but stabilizing growth and has taken a turn for the better. Reform of the financial sector deepened and the financial markets functioned properly. Overall speaking, the financial institutions were sound. Fresh progress was made in financial infrastructure development. The macroprudential policy framework was improved continuously. In general, the 13th Five-Year Plan has posted a good start in its first year. The financial sector developed steadily. The assets and liabilities of the banking sector continued to expand with greater support to economic restructuring and upgrading, and financial services to the weak sectors improved. The reform of development financial institutions, policy banks and large commercial banks was furthered. Pressure eased on the asset quality of the banking sector and the overall credit risk was under control. The market participants of the securities and futures markets achieved sound development, market regulation was enhanced, and fundamental institutional arrangements were improved. The insurance sector expanded rapidly, featuring growth of both assets and premium revenue. The insurance sector’s reform was deepened and the sector provided better services to the society. The financial markets functioned in a sound manner. The financial markets expanded and participants were further diversified. Market institutional arrangements continued to improve and opening-up made notable progress. The money market reported record volume of turnover, the market interest rates were more flexible and moved more consistent with fundamentals of the economy and market trend, and the interest rates generally edged up. The foreign exchange market traded briskly, and more currencies were traded directly against RMB. The volume of bond spot trading posted a large increase y-o-y and the yield curve moved up. The stock market stabilized after the turmoil in the beginning of the year, yet the trading was obviously less brisk. The trading volume of futures grew rapidly. The prices of commodity futures surged while the prices of financial futures were relatively stable. The building of financial infrastructure made new progress. The payment, clearing and settlement systems were further improved, and a number of important regulations were released. The financial laws, regulations and rules were further improved to uphold national and public security, and to streamline administration and delegate powers. The accounting standard system was improved, to better plan for reform and development and to strengthen the system of government accounting standards. The credit information sector developed further and the social credit system building made new progress. Coverage of the credit information system was expanded. The quality of anti-money laundering (AML) work was enhanced, and the FATF’s fourth round of mutual evaluations proceeded steadily. The work in financial consumer protection produced good results and the quality of financial services improved. The macroprudential policy framework was improved. The Joint Ministerial Conference on Financial Regulatory Coordination worked to promote ever-closer coordination in regulatory policies, measures and actions, strengthening synergy and effectiveness of financial regulation. Monitoring and assessment of systemic risks were strengthened, and the resolution regime of G-SIFIs was improved. The MPA system worked effectively, and the macroprudential policy framework for foreign exchange flows and cross-border capital flows was improved. The counter cyclical adjustment of the real estate market was strengthened, and the effect of differentiated credit policies, i.e. city-specific credit policies, was unfolding. The Chinese economy has continued its stable and sound growth. Growth, albeit moderated, remained stable within a reasonable range and the performance has taken a turn for the better. The quality and efficiency of growth has improved, and the economic structure continued to optimize. New breakthroughs were made in reform and opening up. Yet, domestic and global economic situations and financial markets remain complex and present many imbalances and problems. From an international perspective, the world economy is still recovering slowly, and sentiments like protectionism, de- globalization and populism have gained momentum. With the environment getting more complex, unstable and uncertain, black swan events may occur more frequently. From a domestic perspective, the basis is not solid to support stable performance of the real economy and financial system, and downward pressure remains strong. The performance among regions and sectors has continued to diverge, and challenges and risks are not to be underestimated. Higher leverage ratio of the non-financial enterprises, rising volume and ratio of NPLs of commercial banks, potential risks in the implicit borrowing of some local governments, the coexistence of elevated housing prices in hot-spot cities and the large housing inventories in some third- and fourth-tier cities, and the lack of order in financial product innovation pose risks that need to be monitored. Despite the cyclical and scale factors that contribute to the imbalances and problems in the Chinese economy, the root causes are the major structural imbalances that have obstructed the circular of economic activities. The solutions lie in the supply-side structural reforms through which a new dynamic equilibrium in supply and demand will be created. The year 2017 is an important year in the 13th Five-Year Plan and a year for deepening the supply- side structural reforms. We will continue to implement the decisions adopted at the 18th CPC National Congress, the 3rd, 4th, 5th and 6th Plenary Sessions of the 18th CPC Central Committee, take coordinated measures to promote the overall plan of pursuing balanced economic, political, cultural, social and ecological development at the same time and of comprehensively establishing a well-off society, deepening reforms, ruling by law and strengthening Party discipline, follow the general principle of seeking progress while maintaining stability, and adopt and implement the new development philosophy. We need to adapt to, properly understand and guide the new normal in economic development, continue to focus on the quality and efficiency of economic growth and the overall policy design featuring stable macro policy, targeted industrial policy, flexible micro policy, concrete reform policy, and with social policy providing the basic bottom line. We will continue to focus on promoting supply-side structural reforms, boost aggregate demand, strengthen expectation guidance, leverage the role of innovation in driving growth, and do a good job in promoting stable growth, reform, structural adjustment, people’s welfare and risk prevention, in order to pursue stable and sound growth and social harmony. The PBC will