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China's stock drop this year reduces bubble worries, central bank official says

Key Points
  • Zhou Xuedong, spokesperson, director general of the general executive office, People's Bank of China, speaks with reporters in Beijing after the last day of trading in local markets for 2018.
  • Despite a sharp stock drop this year, the market hasn't seen any panic and lower valuations mean there are fewer bubbles, making markets safer, Zhou says. 
  • The Shanghai composite has barely recovered from a near-four-year low hit this fall.
People walk past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, China September 28, 2018. 
Jason Lee | Reuters

China's financial markets are safer after this year's stock market drop, a spokesman from the People's Bank of China said Friday.

The local market is closed Monday, and the Shanghai composite ended the year Friday at 2,493.9, down nearly 25 percent for 2018 in its worst year since 2008. The index hit a high of 3,587 in January but tumbled as much as 31 percent from that level in October amid worries about an economic slowdown, a brewing trade war with the U.S. and corporate financing issues.

"The extent of this drop is rather large," said Zhou Xuedong, spokesman, director general of the general executive office, People's Bank of China. "But the market hasn't seen major panic, (stock) dumping, or a large number of listed companies going bankrupt. This is a natural process of the market adjustment. The market participants have become relatively more mature."

"After the stock market decline from 3,500 to 2,500, (with) valuations this low we are actually very safe," Zhou said in Mandarin, according to a CNBC translation of his remarks to reporters in Beijing on Friday evening. "The fewer bubbles there are, the safer we are. When stocks are safe, the overall banking industry is safer."

Chinese authorities have made a flurry of announcements in the past several months in support of stocks and the economy. Mainland trading is dominated by sentiment-driven retail investors rather than institutions, making market performance less tied to economic growth than stock indexes might be in other countries. But as an indication of how much uncertainty hangs over China, the Shanghai composite has barely recovered from a near-four-year low hit in October and remains half the level it hit in 2015.

However, in contrast to heavy-handed market intervention during the summer market crash of 2015, government handling of the latest stock market drop has been relatively subdued. Authorities have encouraged private funds and local governments to establish investment funds to support companies struggling with a collateral system known as "share pledges."

Last week, members of the Chinese State Council Financial Stability and Development Commission also said there should be implementation of market-oriented principles and reduction of administrative intervention in trading, according to an online post.

When Zhou and other representatives from the central bank were asked Friday to expand on the statement, Zou Lan, deputy director-general of the financial market department, gave the example of the PBOC's success in increasing financing for small- and medium-sized enterprises. He did not answer a question requesting details and timing for financial reform in China.

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Overall, Zhou emphasized he is confident in China's financial stability and noted the larger banks are in good health.

The financial system goes through a cycle roughly every 10 years, so it is about time that the risks which have built up should be exposed, he said.

"China is a country in transformation, transforming towards a market-oriented economy. There are many market systems it hasn't fully" adopted yet, he said.