UPDATE 1-China cbank warns high financial risks amid rising economic headwinds

China needs to resolve outstanding financial risks and must counter risks from "abnormal" market fluctuations that stem from external shocks, said the central bank on Monday, as Beijing prioritizes financial stability amid increasing challenges.

Financial markets are highly sensitive to global trade situations and rising uncertainties in global liquidity, said the People's Bank of China (PBOC) in its annual financial stability report, adding that it will step up real-time supervision on stock, bond, foreign exchange markets to prevent cross-sector risk contamination. Bond defaults may continue, so authorities must prevent the risks of such defaults from triggering systemic risks, it said, while penalties on regulatory violations in the securities market would be increased.

Beijing has stepped up daily supervisions and assessment on potential "black swan" and "grey rhino" events that may occur in the future and has prepared contingency plans, as downward pressure on the economy rises, said the PBOC. The central bank reiterated that it would maintain a proactive fiscal policy and a prudent monetary policy, as well as implement greater tax cuts and increase the issuance quota for local governments' special bonds used to fund infrastructure projects by a large margin.

Looking ahead, the PBOC will tailor its credit supply to better boost the economy and strike a fine balance in achieving growth and fending off risks. "Overall speaking, China's financial risks have been slowly resolved but the risks are still abundant, after accumulating rapidly in the past few years," said the PBOC. It added that potential risks and problems will be difficult to eliminate in the short term.