Coordinated regulation
The government's reform of the financial regulatory system, aimed at improving coordination of different government agencies, will also be crucial to the prevention of financial risks.
In the Government Work Report, Li said the country will strengthen coordination of financial regulation and will also improve regulation of shadow banking, internet finance and financial holding companies.
The reform of the country's financial regulatory system is part of a plan devised by the State Council, China's Cabinet, to use structural reform to streamline and optimize State institutions.
The strategy was unveiled last month at the Third Plenary Session of the 19th Communist Party of China Central Committee.
"Strengthened coordination among regulators will help to eradicate the regulatory void and regulatory arbitrage, enabling full regulatory penetration and coverage. This will help to facilitate the smooth process of financial deleveraging," said Cheng Shi, chief economist at ICBC International.
"The improved regulations will also help to eliminate illegal borrowing by local governments and resolve the issue of their hidden debts."
China has already established the Financial Stability and Development Committee, which will serve as an interagency regulatory coordinator to ensure financial stability and fend off risks. The future role and policies of the committee are expected to be discussed and clarified during the two sessions.
Zhou said the PBOC will play a bigger role in the country's financial regulatory framework because the office of the newly established interagency committee is located within the central bank.
Iris Pang, a China economist at ING Bank, said the "financial super-regulator" will steer the reforms to guard against risks emanating from areas such as online financing platforms, personal loans and wealth management products.
"Financial deleveraging will be the key reform of 2018 because the government is determined to clean up shadow banking in the financial sector," she said.
Tighter liquidity
Some economists have expressed concerns about tighter liquidity and a potential credit crunch in China as a result of strengthened regulation and tighter monetary policy.
"There could be some closures of small online financial platforms, possibly creating credit risks among banks and other nonbank financial institutions that have indirectly lent to those platforms through the interbank market and trust companies," Pang said.
"Overly tight liquidity could create tensions for banks and other financial institutions. But we see this risk as being quite low because the regulators manage liquidity on a daily basis."
Wang Tao, chief China economist at UBS Securities, said the PBOC will carefully manage liquidity conditions to ensure excessive tightening does not weigh on economic growth.
"With the ongoing tightening of financial regulations and supervision, the PBOC will need to carefully manage liquidity conditions to keep China's deleveraging implementation process smooth," Wang wrote in a research note.
Some economists interpreted the omission of specific targets for M2 and total social financing growth in the Government Work Report as an indication that the authorities intend to create more policy leeway and flexibility to address unexpected risks.
"The vague expression showed that the regulator does not want its policy to be labeled as either a tighter or a looser one. Instead, it hopes to use the expression to create more flexibility for its monetary policy," said Steven Zhang, chief economist at Morgan Stanley Huaxin Securities.
