New fund to strengthen financial safety net, smooth market slumps

China's national financial stability fund has accumulated a certain amount of capital with its initial framework established, marking a critical step for the country to strengthen its financial safety net against rising global financial fragility, experts said on Tuesday.

"At present, the fund for ensuring financial stability has established a basic framework in a preliminary manner and has accumulated a certain amount of capital," the People's Bank of China, the country's central bank, said in an article released on Monday.

Financed by market players, including financial institutions and financial infrastructure operators, the fund is aimed at accumulating the capital needed by the central government to deal with major financial risks and will be used when other sources of capital face shortfalls in handling said risks, the PBOC said.

In other words, 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, the central bank said.

China's draft law on financial stability, released in April, 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 fund had raised 64.6 billion yuan ($9.02 billion) as of May, said the China Banking and Insurance Regulatory Commission.

China's efforts to set up the fund are in line with international practices to fend off financial crises, experts said, adding that the fund is expected to be used only to defuse significant financial risks, instead of ironing out normal market fluctuations.

Huang Wentao, chief economist at China Securities, said his team expects the national financial stability fund to collect about 120 billion yuan to 180 billion yuan annually, so as to obtain sufficient capital to handle significant potential financial risks.

Taking similar funds in developed economies as a reference, Huang said it is possible for China's national financial stability fund to consider setting a cap on its funding and developing an information-sharing mechanism for risk monitoring and early warning purposes.

Dong Dengxin, director of the Wuhan University of Science and Technology's Finance and Securities Institute, said the fund can help stem the spread of risks in the initial stage of any possible financial crisis by smoothing market fluctuations and bailing out struggling financial institutions.

The central bank article added 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 the end of 2021, indicating the robustness of financial institution operation.

Risks regarding shadow banking have decreased, 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 as of the end of June, up by 41 percentage points from the end of 2018.

The PBOC will further 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, the article said.