Abstract: On October 30-31, 2023, the Central Financial Work Conference put forward the goal of building China into a financial powerhouse for the first time, elevating financial governance to an unprecedentedly level. To realize the goal, China should step up efforts in six aspects: reforming the financial governance system, clarifying the relationship between macroeconomic regulation and financial regulation, improving the financial system, and prioritizing five areas (fintech, green finance, inclusive finance, pension finance, and digital finance), promoting high-quality financial opening up while ensuring financial and economic security, and preventing and resolving financial risks.
I. The New Goal of Building China into a Financial Powerhouse Has Elevated the Importance of Financial Governance to Historic High Level
The Central Financial Work Conference emphasized: "Good financial governance in the present and future calls for the upholding and strengthening of the overall leadership of the Party, the upholding of Xi Jinping Thought on Socialism with Chinese Characteristics in the New Era as the guideline, the comprehensive implementation of the spirit of the 20th CPC National Congress, and the full and accurate implementation of the New Development Philosophy. We should also fully understand the political and people-oriented nature of financial governance. The main goal is to speed up the development of China as a financial powerhouse; the main theme is to promote high-quality development of the financial sector; the main path is to deepen the structural reform of the supply side of finance; the main pillar is the purity, professionalism and strength of the financial team; and the focus is to comprehensively strengthen supervision to prevent and resolve risks. With a commitment to the general principle of pursuing progress while maintaining stability, and balancing development and security, we will ensure no systemic financial risks arise, follow the path of financial development with Chinese characteristics and accelerate the establishment of a modern financial system with Chinese characteristics, so as to meet economic and social development needs and the ever-growing financial needs of the people, and open up a new chapter of financial governance in the new era." The Conference explicitly proposed to step up the development of China into a financial powerhouse, which elevates the relevance of financial governance to an unprecedented height.
Currently, the importance of financial governance in the national economy is reflected in two aspects:
First, finance plays a great role in boosting economic development. Finance is an important means for the market to allocate resources. At the beginning of the reform and opening-up, finance supported the economy mainly through credit and settlement services, yet the scope and depth of the support were relatively limited. Today, China has established a multi-level financial system that serves all socioeconomic aspects. Finance is expected to bolster scientific and technological innovations, common prosperity, structural transformation and green development, as well as the integration of the Chinese economy into the global economy and the advancement of the Belt and Road Initiative.
Second, preventing financial risks has become a crucial part of China’s national security strategy. The pivotal role of finance in supporting economic and social development also makes the implications of its risks on the economy and society enormous. With China being the world's second-largest economy and deeply integrated with the world economy, there are not only financial risks arising from the the operation of its own financial system and fluctuations in the economic cycle, but also risks arising from fluctuations in the international economy, spillovers of the economic policies of other economies, and international geopolitical dynamics. Finance is no longer a task that has traditionally been domestically oriented. It is in this sense that we need to accelerate the building of a financial powerhouse.
The “power” of finance is manifested in how well it can support socioeconomic development and prevent risks both domestically and internationally.
II. Six Tasks of Financial Reforms
To build China into a financial powerhouse, we need to step up reforms in the following six aspects.
First, the financial governance system should be reformed. In response to the elevated status of finance in the national economy, it is necessary to strengthen the Party's leadership of financial governance, raise financial decision-making to a strategic level, and uphold the political and people-oriented nature of finance. Before the First National Financial Work Conference was held, finance was only an ordinary sector of the national economy that supported the industrial, agriculture and commerce sectors. Since then, finance has increasingly gained significance in the national economy, and the level of financial decision-making has been raised continuously. The Central Financial Work Conference this year has elevated finance to the highest national strategic status.
Second, the relationship between macroeconomic regulation and financial supervision should be clarified and a comprehensive financial supervision system should be established. The function and organizational structure of the central bank should be clearly defined, that is, the central bank should specialize in macroeconomic regulation, macroprudential management and monetary policy. The National Administration of Financial Regulation and China Securities Regulatory Commission should supervise all financial activities, leaving no regulatory gaps or blind spots so as to prevent regulatory arbitrage and illegal financial activities. Local party committees should set up financial committees and financial working committees, and local government financial supervisory bureaus should focus on supervision and fulfill their responsibility of preventing local financial risks.
Third, the financial system should be improved, including the underlying financial infrastructure, financial market system, and financial institution system.
There are several points in this regard. For example, large state-owned financial institutions should be given support to become better and stronger. With the advancement of technology and the globalization of industrial chains and supply chains, financial services increasingly feature large networks, large scale, and large institutions, especially in the context of fierce international geopolitical competition. However, this does not mean that there is no more room for the development of small and medium-sized financial institutions. While the number of small and medium-sized financial institutions is decreasing, there is still a sizable and specific group of clients to be served.
The Conference pointed out the need for insurance to serve as a buffer for the economy and a stabilizer for society. My understanding is that the buffer role is for the real economy so that enterprises can reduce losses and resume work and production in a timely manner when they are hit by natural disasters and other emergencies; and the stabilizer role is for disadvantaged social groups, so that low-income earners, people in difficulties, micro and small businesses, etc., can receive support when they are in trouble, which is an important part of inclusive finance.
Fourth, five areas of finance should be prioritized to meet the economic and social development needs and the growing financial needs of the people. The Conference has specified that fintech, green finance, inclusive finance, pension finance and digital finance are the main directions of financial innovation and financial services in the coming period. It can be said that these five areas are the specific ways for financial services to support the real economy. These are the key directions for high-quality development of China's economy and the transformation of the economic growth model.
In the past, when we talked about financial support for the economy, we tended to refer to financial support for production and distribution, or pure economic activities associated with industries, and seldom touched on areas such as growth patterns, social responsibility, and improvement of people’s life quality. This time, the five major areas of financial development are all-encompassing and forward-looking. Attention needs to be paid to technological innovation, the market-oriented application of science and technology, green development, common prosperity, the potential needs of an ageing society, and the digital model of future economic development.
Fifth, efforts should be made to promote a high level of financial opening and ensure China’s financial and economic security. Notably, the Conference called for efforts to “enhance the competitiveness and influence of Shanghai as an international financial center, and consolidate Hong Kong's status as an international financial center". The opening up of the financial sector is different from that of other industries. Generally, for other industries, to open up is to attract investment under certain market access rules. The opening up of the financial sector not only requires the development of institutional rules, it also needs sound infrastructure, abundant financial instruments and products, an active trading market as media, which are what an international financial center should possess.
High-level financial openness is also bound to be two-way openness, which is also realized through the international financial center. Cross-border financial and economic risks are generally spread through international financial centers. Therefore, developing international financial centers as a national strategy is not only needed for openness and development, but also needed to ensure national financial and economic security.
Enhancing Shanghai’s competitiveness and influence as an international financial center is required for both development and security. That is, while introducing foreign capital, foreign financial institutions, and opening up financial products and transactions, it should support Chinese enterprises to go global, facilitate the globalization of the Chinese economy, bolster the Belt and Road initiative, and promote the prudent and solid advancement of RMB internationalization.
Specifically, Shanghai as an international financial center should be an international financial center for RMB, a cross-border settlement center for RMB, an international investment and financing center for RMB, and an international trading and pricing center for RMB assets. A competitive and influential international financial center is an important symbol of a financial powerhouse.
With high-quality development of the Chinese economy, and high-level financial opening, Hong Kong, as an established international financial center, needs to further enhance its functions. Hong Kong is a bridge connecting China and the world. In the past, it mainly played the role of introducing foreign capital to China, which was one-way; in the future, Hong Kong’s role should be two-way, acting as both a bridge for foreign capital to enter China as well as a bridge for Chinese capital to go global.
Sixth, prevent and resolve financial risks. The meeting has devoted a lot of attention to this aspect. Currently, domestic financial risks mainly include risks arising from the real estate sector, local government hidden debts, some small and medium-sized financial institutions, and financial crimes and financial corruption. In preventing and resolving risks, the Conference particularly emphasized the necessity to grasp the relationship between rights and responsibilities, focusing on solving problems at the institutional level. In addition to the principles and measures already mentioned at the Conference, it is believed that more specific institutional arrangements and measures will be put in place soon after it.
III. Reflections and recommendations
1.Policymakers must keep the bottom line of financial regulation in mind when encouraging financial institutions to serve the real economy, bolstering the five priority areas, and coordinating with macroeconomic polices. This involves the relations between national economic strategy, macroeconomic regulation and financial regulation. A key point of this round of reform is to clear up the relationship between macroeconomic regulation and financial regulation. The key of preventing systemic financial risks lies in guarding the bottom line of financial regulation. Some regulatory indicators and requirements can be adjusted to support national economic policies and macroeconomic regulation, but not those that concern the safe operation of financial institutions.
2. While local governments should carry out their responsibilities for preventing and resolving financial risks, they should be prevented from interfering in the specific operation and management of financial institutions. Local government intervention in the business operations of small and medium-sized financial institutions are a source of financial risks. While local governments do have responsibilities to prevent and resolve financial risks, many of them in fact funded local financial institutions, and so they have the authority and responsibility to supervise the management of these institutions, it is necessary to clearly define their boundary in the supervision and management of local financial insititions. That is to say, it is necessary to clarify the "rights" and "responsibilities" of the local financial commissions, financial work commissions, and local financial supervisory authorities in the management of financial institutions with local legal person status.
3. Policymaking should take into account both domestic and international developments, and enhance macroeconomic management capacity. A higher level of opening-up means that global geopolitical conflicts, international economic fluctuations and changes in foreign macro-policies will all have an impact, positive or negative, on China's economy and finance. China's economic fluctuations and policy changes will also produce spillovers, which will in turn ripple back to affect its own economy and finance. Therefore, policymakers should take into account the domestic and international developments and their possible impact when formulating China's macroeconomic policies and determining the timing of their introduction.
4. In resolving the risks of small and medium-sized financial institutions, reforms should aim to solve problems rather than covering them up. Merger and reorganization is an important way to resolve the risks of small and medium-sized financial institutions, but it must be market-oriented and adhere to the rule of law. This process must reveal risks and resolve them without leaving trouble for future, so that a new institution can truly improve its operation and management in accordance with its new business model. If problems are merely covered up, there won’t be any market-oriented, rule-of-law-based mergers and reorganizations and reforms. In this case, old problems will go over into the new institution, prevent it from completely changing its mode of operation and management, and snowball into bigger problems.
