China's national financial stability fund has gained a lot of capital with its initial framework established, making it a crucial step for the country to strengthen its financial safety net against rising global financial fragility, experts said on Tuesday.
The People's Bank of China, the country's central bank, said in an article released on Monday that the fund for financial stability has established a basic framework in a preliminary manner and has accumulated a certain amount of capital.
The fund is aimed at accumulating the capital needed by the central government to deal with the major financial risks, and will be used when other sources of capital face shortfalls in handling said risks, according to the PBOC.
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Financial institutions, as well as their shareholders and actual controllers, local governments, deposit insurance funds and relevant industry funds, should fully use their resources to resolve significant financial risks in line with their responsibilities and according to the law. If there is still a funding gap, the national financial stability fund will be used upon approval, according to the central bank.
In April, China's draft law on financial stability proposed the establishment of a national fund as spare capital to handle major financial risks and allows the PBOC to provide liquidity support for the fund if necessary. The Chinese Banking and Insurance Regulatory Commission said the fund had raised 64.6 billion yuan $9.02 billion as of May.
China's efforts to establish the fund are in line with international practices to fend off financial crises, and that the fund is expected to only be used to defuse significant financial risks, rather than ironing out normal market fluctuations, according to experts.
The national financial stability fund is expected to collect about 120 billion yuan to 180 billion yuan annually, according to Huang Wentao, chief economist at China Securities.
Taking similar funds in developed economies as a reference, Huang said it is possible for China's national financial stability fund to develop an information-sharing mechanism for risk monitoring and early warning purposes, and that it could be used as a reference.
Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said the fund can help stem the spread of risks in the initial stage of a financial crisis by smoothing market fluctuations and bailing out struggling financial institutions.
As of the end of 2021, the central bank article said that the country's financial risks have been mitigated and are at a controllable level, with 98.9 percent of banking industry assets considered safe by the PBOC's evaluation system.
As of June 30, the article said, as 87 percent of the country's asset management products have become net worth products that do not guarantee investors a specific return, it has gone up 41 percentage points from the end of 2018.
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The article said that the PBOC will strengthen the regulatory basis for financial stability, defuse risks among key enterprise groups and financial institutions, and deepen financial institution reforms to improve corporate governance.