PBOC warns of financial risks, pressure

China's economy is still facing increasing downward pressure and potential financial risks, and the country will use "market means" to resolve local government debt issues, the country's central bank said in its annual financial stability report released on Tuesday.

The foundation of economic recovery is still not solid, the reliance on investment and credit is still increasing and the task of structural adjustment and change of growth model is huge, the report said.

The country will maintain the continuity and stability of the macroeconomic policies and speed up economic restructuring to improve the quality and efficiency of economic growth, it said.

"The message from the central bank's report is in line with the top leadership's stance on management of the economy," Zhang Lei, a macroeconomic analyst with Minsheng Securities, told the Global Times on Tuesday.

The country is now in a phase of changing gear in economic growth, a phase of shifting growth model and a phase for dissolving the side effects from previous stimulus measures. It seems it may take longer to go through the period due to the clash of interests, Zhang said.

The central bank's report also warned against potential risks in interbanking, off-balance-sheet business and wealth management products, and said the risks of non-financial institutions which offer financing services cannot be ignored.

The country will break the "rigid honoring" to allow some high-risk wealth management products to fail in an orderly pattern and allow defaults to happen, the report said.

When risks occur, the issuers and investors should identify their own responsibilities and obligations and bear the risks for their own part, it said.

"Since the second half of last year, the risks from shadow banking have emerged and pressure of debt defaults will be even bigger as many loans will mature this year," Zhang said.

Shadow banking has developed rapidly in China since 2010 as banks run out of lending quotas and loan-to-deposit ratios to expand lending through traditional channels.

Trusts companies and brokerages - the less regulated shadow banking institutions - sell wealth management products to raise funds so they buy loans that banks want to keep off-balance-sheet. Some loans were made to riskier borrowers.

The central bank also said that the country will use market-oriented means to resolve local government debt issues.

"The new leadership has adopted a new mindset in managing the economy, that is not pursuing high investment and returns but focusing on economic restructuring," Zhao Xijun, deputy director of the Finance and Securities Research Institute at Renmin University of China, told the Global Times Tuesday.

If the leadership can remain committed to reforms and restructuring as they have pledged, the short-term pains of slowdown from reforms can be translated into opportunities in the future, Zhao said.