As 2018 comes to an end, the People's Bank of China (PBOC), the central bank, published a report on China's financial stability.
"Current financial risks have generally retreated, and initial success has been achieved in amending financial dysfunction," read the report.
Despite mounting growth pressure and external headwinds, China has made notable progress in defusing financial risks compared with a year ago, when international organizations warned the country of emerging "tensions" in the financial sector.
"The system's increasing complexity has sown financial stability risks," said a report released by the International Monetary Fund (IMF) at the end of 2017, which identified three major risks in the financial system.
Instead of ignoring or denying the identified issues, the central bank made a timely and rather modest response, recognizing the assessments as "professional and valuable" while pledging to draw on the recommendations to improve weaknesses.
In 2018, China has lived up to its promise, with tough regulations rolled out to tackle key risks including high corporate leverage and shadow banking.
The hardline stance is set to continue. At the just-concluded Central Economic Work Conference, which charted a course for the Chinese economy in 2019, senior leaders agreed to maintain the resolute crackdown on major risks.
DEFUSING THE BOMB
The first tension the IMF pointed out was high corporate debt and household indebtedness brought by credit expansion in recent years.
In 2018, China has made steady progress in what it calls "structural deleveraging," using tailored measures to bring down leverage in different sectors.
The corporate sector, often considered the most troubled in terms of debt levels, has seen a decrease in the leverage ratio thanks to the debt-to-equity swap program, which allows companies to exchange their debt for stocks.
By the end of November, the debt-asset ratios of major industrial firms dropped 0.4 percentage points from a year earlier to 56.8 percent, latest data showed.
While China's leverage ratio has stabilized, there remain structural issues that need to be optimized, said Zeng Gang, deputy director of National Institution for Finance & Development.
For many policymakers, winning the fight against financial risks is an art of balance.
"We have to take into consideration market tolerance as businesses in the financial sector are deeply intertwined. We have to defuse the 'bomb' while making sure the train of the Chinese economy runs smoothly on the right track," said Guo Shuqing, head of China's top banking and insurance regulatory body.
The second risk on the IMF's watch list was the fast growth of lending by non-bank financial institutions, which is less regulated and often referred to as "shadow banking."
In 2018, China unveiled what many industry insiders called "the strictest asset management rules in history," which unified regulatory standards for asset management products and addressed issues such as regulatory arbitrage.
The yield on wealth management products has been trending down, partly because some financial institutions stopped guarantying principal or interest to be compliant with the new rules.
In November, the amount of wealth management products that guarantee principal payment saw a decline for the 9th straight month, data from mobile financing platform Rong360.com showed.
More illegal fundraising was put under scrutiny. A massive clean-up of Internet finance businesses resulted in the departure of more than 5,000 incompetent firms in the sector by the end of May, data showed.
"As China tightens oversight of the online lending businesses, many online wealth management platforms have lost their appeal," said Dong Ximiao, a researcher with the Chongyang Institute for Financial Studies, Renmin University of China.
The new asset management rules also addressed the IMF's third concern, "widespread implicit guarantees," which may lead to excessive risk-taking by retail investors and institutions in anticipation of a government bailout.
Authorities were determined to change such a notion. In its report, the central bank vowed to tighten supervision on some "too big to fail" institutions, with risk assessment and stress tests to be conducted on "systemically important financial institutions."
Despite fluctuations in the capital market, authorities have been unswerving in pushing reforms, vowing less intervention on trading while amending rules to let poor-performing firms de-list from the A-share market.
"The regulators focused more on improving the mechanisms of the capital market, which will improve its eco-system and give the market a bigger role," said Pan Xiangdong, an economist with New Times Securities.
In the report on financial stability, the central bank said that to defuse the risks accumulated over the years in China's financial system, some costs need to be paid.
"As China strengthens financial supervision, some periodic risk events will be exposed, bringing short-term pains to the financial market or even the economy as a whole. It is expected, and should be accepted," said the PBOC report.