Black Swans and Grey Rhinos: Demystifying China's Financial Risks and the Financial Regulatory Reform

Abstract

China now has a gigantic financial industry worth trillions of dollars. Its banks and insurance companies are among the largest in the world. It also holds three of the most active stock exchanges and thousands of public companies. Fintech firms have sprung across the country including top global players such as the Ant Financial Services Group. The rapidly growing size of the financial industry, coupled with fintech innovations, have produced various financial risks endangering China’s financial stability and economic growth. Such risks include asset bubbles, mounting debt, shadow banking and $3.8tn of capital flight. Some predictable financial risks in China are described as “black swans” while other unpredictable elements are referred to as “grey rhinos”. Accordingly, China has undertaken large regulatory reforms recently. It created a super regulator, the Financial Stability and Development Committee (FSDC) to strengthen macro-prudential supervision and enhance the cooperation of sector-based regulators. It has merged the banking and insurance regulators. The People’s Bank of China (PBOC) has been given greater powers of rule-making. More financial technocrats have been appointed to top positions of financial authorities.

Keywords: China, Financial Regulation, Financial Reform, Financial Risk, Black Swan, Grey Rhino, Systemic Risk, Financial Stability, Macro-Prudential Regulation, Financial Stability and Development Committee, People’s Bank of China, Property Bubble, Capital Flight, Shadow Banking, Fintech