China’s financial system is becoming more vulnerable due to high levels of leverage, or borrowing, the central bank governor Zhou Xiaochuan has claimed.

Writing in an article published on the People’s Bank of China’s website late Saturday, Mr Zhou warned about the prospect of potential financial problems in the world’s second-biggest economy.

Mr Zhou claimed that the country needed to tighten regulation as the governor warned about looming risks.

The central bank governor released his strategy to avoid a financial crisis by calling for equity funding and to eliminate “zombie” companies.

Risks of damage to the financial markets in China are “hidden, complex, sudden, contagious and hazardous,” according to Mr Zhou.

He wrote: “High leverage is the ultimate origin of macro financial vulnerability.

“In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly.”

Mr Zhou, who is expected to retire after a record 15 years, referred to a fear of sudden collapse in asset prices after large periods of growth.

When answering questions at the 19th Communist Party Congress report, Mr Zhou explained how to strength China’s financial system.

He said: “Financial risks include basic risks associated with financial markets and financial institutions.

“For example, some unhealthy financial institutions fail to meet relevant standards, and as a result may have to be closed or go bankrupt.

“By comparison, systemic financial risks can lead to financial crisis, set off dramatic chain reactions in the market, and cause great shocks to the economy and employment.”

The Governor did explain that the overall health of the financial system in China remained good, despite warnings.

In the article Mr Zhou also said China should: “actively develop equity financing, and steadily increase the proportion of direct finance.”

In a bid to fight off risks, China should handle “both cause and symptoms”, and be active in “both pre-emptive measures and reactive solutions”, Mr Zhou wrote.

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