Macroprudential Policy in China’s Real Estate Market

From the IMF’s latest report on China:

“The counter-cyclical capital buffer (CCyB) is an important macroprudential instrument. The FSS-C could review this regularly, and make proposals for its activation. Activation/adjustment should also be considered jointly with measures to further rein in shadow banking, and possible increases in capital requirements for other reasons (Box 6).

The PBC’s macroprudential assessment (MPA) has been a useful monitoring tool but its purpose and structure would now benefit from review. The MPA monitors seven categories of financial stability indicators (recently broadened to cover off-balance sheet credit expansion) on a bank-by-bank basis, some of which are key macroprudential indicators. Assessments under MPA, such as compliance with interest rate or credit policy, involve some PBC discretion, as do the administrative penalties applied informally to banks failing the MPA. Currently the MPA is used to determine access to PBC facilities and remuneration of reserves, rather than being tailored to address systemic risk. MPA results should not determine access to PBC facilities. Moreover, the purpose of the MPA should be reviewed and clarified, its structure simplified, and the methodology published. To ensure close interagency coordination, any macroprudential action recommended on the basis of the MPA should be discussed by the proposed FSS-C, for action by individual regulators.

Tighter liquidity requirements are warranted on macroprudential grounds. At the entity level, negotiable certificates of deposit have recently been included in the limit on interbank liabilities. However, the Liquidity Coverage Ratio (LCR) should also be extended to smaller banks, and at the product level, rules on asset allocation and redemption should be tightened, and valuation rules should be revised.

Data gaps, including insufficient interagency information sharing, should be addressed. Collection of loan-book related data by the CBRC appears to be strong, but supervisory access to data has not kept pace as risks have migrated to investment books and off-balance sheet products. Priorities are (i) better granular data on banks’ investments and interbank exposures; (ii) empowering the FSS-C to require institutions, including nonfinancial institutions that provide financial services, to report data related to financial stability; and (iii) adopting common accounting standards across financial institutions to facilitate monitoring risks. Ongoing plans to develop a joint regulatory financial data platform should be prioritized. The quality and scope of the credit registry system should be strengthened by capturing individual indebtedness to nonbanks (such as P2P). Fuller coverage and centralization of property market indicators across all regions is desirable.

Property market risks have risen, while the tools for managing them are predominantly local. Homebuyers are more leveraged than during the last episode of rising market risk, and the rising share of high-LTV mortgages is a concern. Refinements to the calibration of housing market measures—such as the use of stressed interest rate assumptions in debt-service-to-income limits—would be useful.

Property market policies that are decentralized and implemented at the municipal level should be standardized. While measures are enacted in consultation with local branches of the PBC, CBRC, and other relevant authorities, local governments’ GDP growth targets and social stability and fiscal objectives may prevent timely tightening or lead to premature relaxation of some measures. There are sound reasons for local government involvement in these decisions. But local-level committees, involving local governments and local PBC and CBRC offices, should be formalized and meetings held regularly, using risk analysis provided by the PBC, to help ensure comparable treatment across cities and reduce the scope for belated tightening or premature relaxation.”

Posted by at 1:30 PM

Labels: Housing


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