Interpreting the National Conference on Financial Work: What are Important Signals?

Source: People’s Daily

Serving the development of the real economy, preventing and controlling financial risks and deepening financial reforms, these are current and future tasks of China in the financial sector defined on the National Conference on Financial Work. Against the background of a new normal, what are the trends and tasks of the financial sector in China? How to prevent and tackle financial risks? What can finance do to facilitate the supply-side reform? To answer these questions, reporters of China Daily interviewed related experts on 15 th July.

Taking Active Measures to Prevent and Control Financial Risks

Financial risks are controllable, but potential risks should not be neglected

“At a time when we are faced with a global economic slowdown and the transition to a new normal in China, the Conference is of great significance with far-reaching influence on financial reform, development and stability in China”, said Dong Ximiao, Guest Researcher in Chongyang Institute for Financial Studies, Renmin University of China. In recent years, the financial sector in China has made significant progress, but problems and risks propping up from the process of development also emerged, which need to be carefully responded to through promoting the supply-side reforms.

Financial security is a crucial part of national security. The National Conference on Financial Work stressed that preventing systematic financial risks is always the priority of financial work. Therefore, we should attach greater importance to preventing and solving financial risks through taking scientific precautions, ensuring early identification of problems, issuing warnings as soon as possible and making effective efforts to handle risks and problems with preventing and solving risks in key areas and improving financial bulwark and emergency settlement mechanisms as the priorities.

“Currently, financial risks are controllable, but potential risks should not be neglected”, said Qiu Gaopan, Chief Researcher of the Financial Research Center of the Bank of Communications. The Conference stressed the importance of preventing and tackling financial risks, which is conducive to further improving and deepening early-stage financial risk prevention and control measures, safeguarding the bottom line of zero systematic financial risks and ensuring national financial security and stability.

“Market stability is the foundation of reform and development. Therefore, we should take firm measures to prevent the emergence of systematic financial risks to allow finance to better serve the development of the real economy. In the capital market, it means we need to prevent market volatilities.”Said Teng Yin, Senior Analyst in Everbright Securities.

Debt risk is an important part of financial risk. Currently, deleveraging is being promoted at a steady pace with the asset liability ratio of industrial businesses of scale being reduced by 0.7 percentage points to 56.1% at the end of May this year. However, in certain industries and areas, high leverage ratio and potential government debt are still severe problems.

The National Conference on Financial Work pointed out that we should give priority to business deleveraging and tackling “zombie firms”. Party committees and governments of all levels should develop a right view on performance, strictly control the aggregate of government debts, take harsh punishments and hold everyone accountable.

“With downward pressure in economic growth, huge debt is more likely to lead to financial risks. Therefore, we should take active and steady measures to deleverage according to the requirement of the supply-side structural reforms in reference to local circumstances.” Professor Tian Lihui at Nankai University Institute of Finance and Development pointed out that deleveraging should follow the principle of targeted policy application to shut down “zombie firms” to prevent them from taking up precious financial resources and use market-based and law-based measures to revitalize existing stock and optimize increment.

“Government debt risks are gradually being solved”. According to Professor Hu Yijian at Shanghai University of Finance and Economics, government debt in China is overall controllable, but there are still risks in certain sectors, which may lead to risks in regional financial markets. What’s more, with a tighter fiscal budget, some local governments resort to the integration of government and social capital and service procurement for further financing, which may lead to new potential risks.

Dong Ximiao pointed out that in the current stage and afterwards, we will continue to regard preventing financial risks as the priority of financial work to strengthen the supervision, control and coordination of finance and promote the organic combination of institutional and functional supervision and micro behavioral supervision and macro prudent supervision.

Resuming the Basic Function of Serving the Development of the Real Economy

The financial sector would suffer from its own over-expansion if it separates itself from the real economy

In recent years, the financial sector in China realized leapfrog development while serving the growth of the real economy. However, with rapid expansion, the financial sector showed signs of separating itself from the real economy, with the effectiveness and efficiency of serving the real economy needing to be improved. At the same time, the prominent problem of the difficulties and high cost of financing is harmful to the promotion of the supply-side structural reforms.

The Conference proposed that finance should regard serving the real economy as its objective and priority, comprehensively improve the efficiency and quality of services and allocate more financial resources to key areas and weak links in social and economic development to better meet the diverse financial need of the public and the real economy.

“Serving the real economy is not only the basic objective, but also the foundation of the existence and expansion of finance”, said Qiu Gaopan. In recent years, shadow banking developed too fast in China with the trend of pursuing mere expansion rather than serving the real economy, which is harmful for not only the development, transition and upgrade of the real economy, but also the steady and sound development of finance itself. The Conference underlined that finance should better serve the development of the real economy to help the financial sector to restore its original function and provide more powerful and effective financial support to the supply-side structural reforms in China.

“Currently, indirect financing from banks represents the major part of the financial structure in China with direct financing being the shortfall constraining the function of finance in serving the real economy”. According to Teng Yin, raising the proportion of direct financing needs us to constantly promote the institutional construction of the capital market, improve the basic institutions of the mainboard market and actively develop the growth enterprise market (GEM) and the new third board and regulate the regional equity market to develop the securities market with quality agency investors and over-the-counter market as the priority and create a better environment for the expansion of direct financing.

“As part of the service industry, finance needs to serve the development of the real economy through optimizing the allocation of capital resources”, said Tian Lihui. To better serve the real economy, financial institutions should focus on performing its basic functions and make full use of its advantage in price-setting, risk management and capital allocation to prevent the tendency of alienating from the real economy, enrich the supply of financial products and “quench the thirst” of the real economy. At the same time, insurance agencies should make full use of their advantage in large capital reserves, long duration and steady source of financing to become a stabilizer and propeller of the real economy.

Besides, serving the real economy is also the fundamental way to prevent financial risks and ensure the sustainable and sound development of finance.

According to Dong Ximiao, the development of global finance in the past half a century shows that the effect of financial risks on economies is nearly destructive. The reason is that the financial systems of these countries or regions have internal flaws. To be more specifically, financial development and innovation has been focusing too much on mere expansion rather than serving the real economy.

“Being separated from the real economy, finance is like tree without root or water without source, which is set to lead to problems”. According to Hu Yijian, finance and the real economy are interdependent and symbiotic. Without the solid foundation of the real economy, the financial sector would suffer from its own expansion, in turn, without the positive development of finance, the real economy would lose its vigor and vitality.

Promoting the Reform and Open-up of the Financial Sector

Stressing both direct and indirect financing to actively support the capital market to “go global”

“Financial reforms constitute an important part of the comprehensive deepening of reforms and a practical measure in promoting supply-side structural reforms in in finance”, said Qiu Gaopan. Promoting financial reforms against the background of the New Normal needs us to implement new development concepts, optimize currency policy framework, deepen reforms of financial regulation system and institutions, interest rate liberalization and currency exchange formation mechanism, financial markets of different levels and modern corporate system of financial institutions and improve the financial and green finance service system for small and micro enterprises, “agriculture, rural areas and farmers” and scientific innovation.

“Deepening financial reforms needs us to strengthen both direct financing and indirect financing”, said Dong Ximiao. In direct financing, China should actively promote the construction of the mainboard, new third board, regional equity trading and equity crow-sourcing markets to take coordinated efforts to build a well-regulated, multi-level capital market system with complementary functions. In indirect financing, we should give priority to the reform and innovation of financial institutions in the banking sector, accelerate the strategic transition of large banks, develop small and medium-sized financial institutions and better serve the real economy and consumers of financial products.

In recent years, the financial regulation and supervision system in China has been gradually improved with significant progress being made in preventing and solving financial risks and promoting the compliance of financial institutions. However, with the emergence of the trend of integrated operation of financial institutions, cross-sectoral risks are more likely to occur. Therefore, the financial regulation and supervision coordination mechanism needs to be upgraded.

The Conference on Financial Work decided to establish the Financial Stability and Development Committee of the State Council to strengthen the duty and responsibility of the People’s Bank of China on macro prudent management and systematic risk prevention.

Dong Ximiao pointed out that the establishment of the Financial Stability and Development Committee of the State Council is an important result of the Conference. Compared with the existing Ministerial Meeting on Financial Supervision and Coordination, the Committee has more functions and is of higher level. Financial supervision and coordination will be the major task of the Committee. At the same time, the People’s Bank of China will carry out greater responsibilities in macro prudent management and systemic risk prevention and control. Through the strengthening and improvement of the financial supervision and coordination mechanism, the deepening of financial supervision institutional reforms and the optimization of the coverage of financial risk supervision, the People’s Bank of China is able to better respond to possible liquidity risks, credit risks and operation risks emerged in the integrated development of financial institutions and prevent systematic risks with widespread economic and social impact.

“The establishment of a unified coordination institution can change the situation of each fighting his own battle, prevent lack of supervision or too much supervision and effectively guide capital to serve the real economy to realize the China Dream with the help of finance”, said Tian Lihui.

Since the adoption of the Reform and Open-up Policy, China witnessed closer ties between the Chinese economy and the world economy. With the implementation of the strategy of “Chinese businesses going global” and the promotion of the “Belt and Road” Initiative, the awareness of integrating finance with national strategies to improve services is increasing. The Conference proposed a more arduous task for finance to deepen reform and open-up.

According to Dong Ximiao, China will steadily promote the internationalization of RMB, accelerate the connectivity with the capital market in related countries and regions and actively support the capital market to “go global”. China will also make domestic financial institutions more open, encourage Chinese institutions to establish branches in abroad and create greater room for the development of foreign financial institutions in China. At the same time, China plans to gradually lower the threshold of market excess, expand the scope of investment, strengthen the support to financing at home and abroad, improve cross-border supervision and coordination and facilitate eligible businesses to go public in foreign markets.