China is likely to pass a key law in 2024 that will provide a predictable framework and enriched financial support for resolving financial risks, underscoring the country’s unwavering commitment to preventing systemic financial risks, experts said on Monday.
One of the priorities of the law would be to set up the Financial Stability Guarantee Fund, which experts said could be worth at least hundreds of billions of yuan and would act as a last resort to deal with major financial risks.
They added that a draft version of the law could be submitted to China’s top legislature for a second review as early as this month, as the country places increasing emphasis on financial risk management amid a property market downturn and local government debt problems.
All eyes are on how the annual Central Economic Work Conference will map out China’s key financial risk prevention tasks in 2024, after a meeting of the Political Bureau of the Communist Party of China Central Committee on Friday called for continued effective risk prevention and mitigation in key areas and resolute prevention of systemic risks.
Liu Junhai, director of the Centre for Business Law at Renmin University of China, said the passage of the Financial Stability Law is crucial for China to achieve such goals, as it will provide a top-level blueprint to harmonise the efforts of various stakeholders in managing financial risks and prevent any disjointed or contradictory actions.
“The law would serve as a ballast to ensure financial stability and boost market confidence,” Liu said, citing the need for the law to help more clearly allocate the responsibilities of various parties, such as property developers and banks, in resolving the financial risks caused by the property market downturn.
In December, the Standing Committee of the National People’s Congress, the country’s top legislature, reviewed the draft financial stability law for the first time. The People’s Bank of China, the country’s central bank, said in a report in November that it would facilitate the law’s introduction as soon as possible.
Xing Huiqiang, a professor at the law school of the Central University of Finance and Economics, said the law is likely to be adopted in 2024 and will provide a rules-based, predictable framework for resolving financial risks, improving the efficiency of risk resolution compared with the current case-by-case method.
“Typically, a draft law must go through three rounds of deliberation by the supreme legislative body before it is enacted, with at least six months between each review. This means the earliest the law could be passed is June next year,” Xing said.
Ming Ming, chief economist at CITIC Securities, said he expected the NPC Standing Committee to conduct the second review of the draft law this month, barring exceptional circumstances.
The draft proposes the establishment of a financial stability guarantee fund to be used when financial stability is seriously threatened. The PBOC recently said the fund has established a basic, preliminary framework and accumulated a certain amount of capital.
Xing said the financial stability guarantee fund could be worth at least hundreds of billions of yuan. He recommended that the fund be reserved for managing severe financial risks associated with systemically important financial institutions, rather than risks associated with smaller financial institutions or stock market fluctuations.
In the case of a potential collapse of financial institutions or real estate companies, Ming of CITIC Securities said the fund could only be used if the collapse had seriously threatened financial stability, after all market-based solutions had failed and after the State Council, China’s cabinet, had approved a coordinated plan to deal with the situation.
Ming added that the fund is unlikely to alleviate stock market volatility, as stock market fluctuations do not necessarily lead to systemic financial risks and can be handled by market-based strategies.