Abstract: In this paper, the author elaborated on the direction of financial reform during the 14th Five-Year Plan period from the five aspects: improving the financial regulation system, establishing a modern financial institution system, building a financial service system that effectively supports the real economy, building a systemic financial risk prevention and control system, and building a higher-level and open financial system.
I. Direction of financial reform during the 14th Five-Year Plan period
1. Improve the financial regulation system
It is important to improve the modern central bank system, perfect the long-term mechanism for the central bank to regulate the liquidity, capital and interest rate constraints on banks, and keep the growth rates of money supply and social financing scale in line with the nominal economic growth rate.
Strengthen the rules and transparency of monetary policy operations, establish an institutionalized monetary policy communication mechanism, and effectively manage and guide market expectations.
Improve central bank's policy interest rate system with open market operation rates as short-term policy rates and medium-term lending facility rates as medium-term policy rates, improve the interest rate corridor mechanism, and guide market interest rates to fluctuate around the central bank's policy rates.
Deepen the reform of the loan prime rate, and drive the deposit interest rate to gradually become market-oriented, so that the central bank's policy interest rate can be smoothly transmitted to the loan interest rate and the deposit interest rate through the market interest rate.
Strengthen the coordination of macroeconomic policies, e.g. monetary and fiscal policies, enhance the overall integration between monetary policy and employment, industry, investment, consumption, environmental protection, and regional policies, and build an efficient and coordinated macroeconomic governance system featuring optimized objectives and sound division of responsibilities.
Implement an independent central bank financial budget management system to prevent the monetization of fiscal deficits and build a "firewall" between fiscal department and the central bank.
2. Establish a modern financial institution system
China must establish a highly adaptable, competitive, and inclusive modern financial institution system that is based on market principles, governed by law and up to international standards. With strengthening corporate governance as the core, it is necessary to deepen the reform of state-owned commercial banks so as to better serve small, medium and micro private enterprises.
Starting from improving the system, it is necessary to support the sustained and healthy development of small and medium banks and rural credit cooperatives, and form a banking system structure with fair competition among all types of banks.
Reform and optimize policy-based finance, implement separate account management for policy-based and commercial businesses, and enhance the ability to support national strategies.
Improve the financing structure, vigorously develop the bond market and multi-level capital market, and increase the proportion of direct financing.
Make overall plans for financial infrastructure, including comprehensive financial statistics, anti-money laundering, and financial market registration and custody, clearing and settlement, payment, and credit investigation, promote the interconnection of various financial infrastructures at home and abroad, and build a financial infrastructure regulation system that adapts to the two-way opening of finance.
3. Build a financial service system that effectively supports the real economy
Roll out well-designed cross-cycle policies at the macro level, and use modern monetary management to promote high-quality economic development. Introduce incentive compatibility mechanisms at the micro level, innovate structural monetary policy tools, guide financial institutions to optimize credit structure, support key areas and weak links of the national economy, and ensure the smooth transmission of finance to the real economy.
First, it is necessary to persist in innovative development and improve the financial services to better support innovation. Let financial institutions provide a full range of financial services for innovation enterprises in accordance with the law of the scientific and technological innovation life cycle. Accelerate the formation of a system of venture capital institutions boasting distinctive features, vitality, market-oriented operation, and professional management. Broaden the sources of venture capital funds through multiple channels. Give full play to the functions of the main board, the science and technology innovation board, the small and medium-sized enterprise board, the growth enterprise board and the national small and medium-sized enterprise share transfer system (new third board), and unblock the market-oriented exit channels for venture capital. Explore effective ways of financial support for the development of high-tech agriculture, and increase support for agricultural science and technology fields such as forest economy, board economy, biological seed industry, modern agricultural machinery, and smart agriculture.
The second is to adhere to coordinated development and build an institutional mechanism where finance can effectively support the real economy. It is necessary to institutionally encourage financial institutions to increase medium and long-term financing in key areas of the national economy such as modern service industries and manufacturing, guide financial institutions to support the transformation and upgrading of traditional industries, expand investment in strategic emerging industries, and provide high-level financial services for economic restructuring. Remove the implicit lower limit of loan interest rates, guide the allocation of financial resources to small and micro enterprises and private enterprises, improve the competitiveness of the credit market for small and private enterprises, and solve the problem of financing difficulties for small and micro enterprises and private enterprises from the institutional perspective. Maintain the overall stability of the legal person status of county financial institutions and promote the coordinated development of urban and rural areas.
Third, stick to the concept of green development, and build a green financial system in support of a low-carbon economy. Channel more financial resources into green and low-carbon sectors to enable China’s carbon reduction and neutrality goals. Fully tap into the market mechanism with proper government incentives to establish a multi-layered, diversified market system for green finance to promote market-based transactions of carbon emission rights. Promote the concept of ESG, and encourage banks to introduce innovative green financial products and services. Accelerate to foster intermediary agencies that serve the development of green finance. Boost international cooperation to develop a unified set of Chinese standards for green finance and align them with international ones. Promote reginal cooperation in this field under the Belt and Road Initiative (BRI) to attract more international investments into Chinese green financial assets.
Fourth, press ahead with two-way financial opening-up. Grant access to the Chinese financial industry to all kinds of eligible investors in a legitimate and compliant manner, invigorate sound market competition and innovation, and create a level playing ground for financial institutions of all sorts.
Fifth, promote inclusive finance for shared development. Intensify financial supports for vulnerable links in the Chinese economy, build a sound rural financial service system in support of rural modernization, protect food security, so that the two drives of financial poverty alleviation and rural revitalization work in concert. Explore digital means in improving the coverage, accessibility and sustainability of inclusive finance.
4. Step up prevention against systemic financial risks
China needs to build a sound system for modern financial regulation that is more transparent and law-based.
Establish a macro-prudential policy framework with intensified regulation over financial groups including systemically-important financial institutions and financial holding companies, and forge a long-term mechanism to prevent and resolve financial risks.
Put in place authoritative, effective and professional risk disposal mechanisms, give full play to the deposit insurance system in orderly phasing out problematic institutions, and build a sound, market- and law-based exit mechanism for high risk financial institutions, so as to address local and structural risks.
Continue to improve the central-local two-tiered financial regulation system.
Enhance the system for financial risk prevention, early warning, disposal and accountability with zero tolerance for irregularities.
Optimize the multi-layered early warning indicator system, polish risk assessment tools including stress tests, step up cross-sector, cross-market and cross-regional financial risk identification and early warning, and hold the bottom line of stepping aside systemic financial risks.
5. Create a new system for open finance at a higher level
Under the new development pattern of dual circulation, China should promote deeper and wider financial opening-up and create a new system for a higher level open finance that is based on market principles, governed by law and up to international standards. It’s imperative for the country to pursue institutional opening-up with updated rules and mechanisms to replace the previous goods- and factor flow-driven opening-up, so as to achieve win-win outcomes.
Fully implement the financial opening moves and measures promised in recent years to attract more global financial institutions to the Chinese market.
Put in place the pre-establishment national treatment plus the negative list system with a unified threshold for access to support across-the-board institutional opening-up.
Press ahead with financial service opening-up, reform of the Renminbi exchange rate formation mechanism and Renminbi internationalization in a coordinated manner.
Promote Renminbi internationalization prudently. Ensure that the whole process is market-driven, respect the choices of businesses, and work to build new win-win cooperation based on free use of the currency. Maintain a flexible exchange rate for the Renminbi; give full play to its function as an automatic stabilizer to the macro economy, in order to strike a balance between internal and external equilibriums.
Actively participate in the reform of global economic governance system, improve coordination with international financial institutions and major economies via multilateral, bilateral and regional platforms, build a sound financial cooperation network under the BRI, deeply engage in the global economic and financial rule-making process, so that China can play its due part in driving global economic and financial governance reforms.
Balance development and security. China needs to make a wider financial safety net amid financial opening-up and build various firewalls that can help cope with and resolve material risks and improve regulatory capacities.
II. Stability remains the focus of Chinese monetary policy in 2021
Chinese monetary policy aims to ensure price stability and enable economic growth. In the new development landscape, the PBC pays special attention to employment among the four objectives of China’s macro-control. Of course, asset price is also a concern for us.
It’s hard to conclude whether there’ll be price rises and inflation expectations in the near future. The world’s post-pandemic economy still has enormous uncertainties. Some believe there’s a risk of inflation due to massive fiscal and monetary easing among countries. Yet such accommodative policies have been made and implemented for a long time since the 2008 financial crisis. Given the uncertainties, I think we still need more observations to determine whether there’ll be a fundamental shift in prices.
Accommodative policies don’t necessarily lead to price surge. Euro zone has seen low prices, and one cause is that their policies make capitals more available for zombie companies. The market could not be clear, leading to overproduction and depressed prices. Of course, this is only one of the effects. All in all, price can be affected by many factors, and ultra-loose macro-control does not necessarily lead to price rise.
The PBC’s 2021 monetary policy will maintain its focus on stability. While sustaining market liquidity and support to real economy, the bank will also stick to the prudent monetary policy while keeping a normal policy space. We will pay close attention to the changes of macro-control indicators – price change being the most important one – to have a good grasp of the key, the scale and the tempo of monetary policy.
Steady policies refuse a deluge of strong stimulus. Through innovations on structural monetary policy tools, the PBC will prioritize agriculture, rural areas, rural residents, and small and micro businesses in support. At the same time, the bank will strengthen communications with the market, e.g. by holding press conference and briefing. We’ve already been doing this for the betterment of the monetary policy framework and the PBC’s role as bellwether to the market expectations.
III. Strengthen macro-prudential regulation and prevent systemic financial risks.
I want to finish this by talking about the plans of PBC, as the lender of last resort, on preventing systemic financial risks and maintaining financial stability.
The first is to strengthen macro-prudential regulation. We’ll pay close attention to changes of macro leverage ratio, conduct a more comprehensive and accurate risk assessment and stress test on the financial system. One of the actions we have taken is strengthening the macro-prudential management of systemically important financial institutions and financial holding companies. The point is that China has been dedicated to green and low-carbon development, and therefore industries with high-carbon emissions will gradually fall out of the market. By then, relevant financial resource investment may face revaluation, resulting in potential systemic financial risks.
The financial risks associated with climate change have been an international concern. Countries are exploring how to put it on the agenda of macro-prudential regulation. Chinese president Xi Jinping announced the “30/ 60” goal (peaking carbon emission by 2030 and achieving carbon neutrality by 2060) in his speech at the UN General Assembly on September 22,2021. During and after the 14th Five-Year Plan (2021-2025), green development will be an important mission, for which we should be prepared.
Second, give full play to the role of early intervention of deposit insurance institutions. In enhancing risk monitoring of financial institutions, we’ll consider to establish a dynamic risk alert mechanism that could trigger early intervention by the deposit insurance institutions, as a resort to risk aversion.
The third is to form an effective debt disposal mechanism. Construct a market-oriented and legalized financial institution debt disposal mechanism with clarification on disposal institutions, the source of funds, the order of repayment, and the obligations of related parties. To reduce dependence on the PBC’s role as the lender of last resort and ensuing ethnic risks, the responsibilities of local governments, problematic institutions and their creditors should be consolidated.
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