Seek progress while maintaining stability and take active measures to provide better services to the real economy
Governor Yi Gang, People’s Bank of China
(China Development Forum, March 25, 2018)
Ladies and gentlemen, honorable guests,
It is a great pleasure to attend the China Development Forum once again. I would like to take this opportunity to share with you the finanical policies in the process of supply-side structural reform and the experiences and views in our work.
First, we are delighted to see the stable and positive performance of the Chinese economy. Under the leadership of the CPC Central Committee and the State Council, we have made remarkable achievements in social and economic development and significant progress in various reforms. The year 2017 witnessed China realizing stable, better-than-expected economic performace and having good scores in high-quality development. First, major economic indicators posted better than expected readings. GDP growth rebounded the first time after 2010 with good employment and stable prices. The positive trend has continued well into 2018. Second, the supply-side structural reform has achieved preliminary success. In 2017, capacity utilization rate of the manufacturing sector reached 77%, hitting a fairly high level in five years; the profits of manufacturing enterprises surged 21%. New technologies and new businesses such as the Internet, big data and artificial intelligence have emerged, resulting in higher quality growth and efficiency. Third, people’s living standard has continued to improve. In 2017, the per capita disposable income rose 7.3% in real terms, 0.4 percentage points higher than GDP growth. Poverty alleviation has outperformed target. Air pollution in key cities has been reduced visibly. The development concept that lucid waters and lush mountains are invaluable assets has become better known to the public.
In the financial sector, we have three major tasks at the current stage, namely implementing a prudent and neutral monetary policy, promoting reform and opening-up of the financial sector, and preventing and mitigating major risks and safeguarding overall stability of the financial sector. Let me elaborate on the three tasks.
The first task is to implement a prudent and neutral monetary policy and to enhance the financial industry’s capacity to serve the real economy.
As is known to all, the principal contradiction of the Chinese society and its development stage have changed profoundly, and China has moved from a period of rapid growth to high quality development. This is a judgement of major importance. Since 2017, the monetary policy has focused on the improvement of quality. While providing strong support to the real economy, monetary policy emphasizes more on creating conditions for transformation of development model, economic structural optimization and new growth drivers to improve the quality and efficiency of economic performance. First, the conduct of monetary policy has kept liquidity at a reasonable and stable level and guided moderate growth of money, credit and all-system financing aggregate. To provide a reasonable and stable level of liquidity for the banking system and to guide financial institutions to strengthen support to the real economy, a mix of instruments with various maturities were employed, meeting the reasonable demand for liquidity and helping stabilize the macro-leverage. Second, the monetary policy has played a role in guiding structural adjustment where appropriate. Structural instruments such as credit-policy supporting central bank lending, pledged supplementary lending, targeted reserve requirement reduction were used to guide financial institutions to enhance support to the key fields and weak links of the real economy and to promote structural adjustment and upgrading. In Quarter Four last year, we rolled out targeted reserve requirement reduction policy for inclusive finance businesses including small and micro enterprises, the agricultural sector, rural areas and farmers(hereinafter referred to as rural development), poverty alleviation, mass enterpreneurship and innovation, appliable to loans to small and micro enterprises where a single borrower has received a credit line of below RMB 5 million, to effectively improve the targeting accuracy of the policy. The targeted reduction policy has been fully implemented this January. Third, price instruments have been used when necessary for preemptive adjustment and fine-tuning. Interest rates have served as levers in adjustment; the RMB exchange rate has become more flexible, and exchange rate was stable at an adaptive and equilibrium level. The prudent and neutral monetary policy has generated positive outcomes, providing strong impetus to the sound and stable growth and facilitating gradual deleveraging of the financial sector. At end February 2018, broad money M2, RMB loans and all-system financing aggregate rose 8.8%, 12.8% and 11.2% respectively year on year.
Going forward, the monetary policy will continue to be prudent and neutral to create a proper financial and monetary environment for supply-side reforms and high-quality development. The stance will be kept appropriate at the aggregate level; money supply will be properly managed to keep liquidity in the banking system at reasonable and stable levels and maintain reasonable growth of M2, credit and all-system financing aggregate. The Government Work Report this year does not specify a quantitative target for M2 and all-system financing aggregate, a change that reflects the requirement for high quality development. While properly managing the aggregate volume, the focus will be on quality and structural improvement, on rendering targeted and reasonable support to the weak links in the economy and better servicing the real economy. Accurate and moderate “trickle irrigation” will be provided to the key areas and weak links where private capital has seldom come in; measures will be taken to beef up support to inclusive finance such as poverty alleviation, small and micro enterprises, rural development, mass entrepreneurship and innovation, and green finance, and in particular the deeply impoverished areas, to contribute to winning the two hard battles of targeted poverty reduction and pollution prevention and treatment.
The second task is to promote financial sector reform and opening-up and to improve the competitiveness of China’s financial industry.
The Report delivered at the 19th CPC National Congress and the Government Work Report both contains explicit requirements on deepening reform of the financial system and further opening-up. We have made notable progress in promoting reform and opening-up in the financial sector. First, financial sector reform has been steadily advanced, with the market mechanism, adjustment and control mechanisms all being improved to enable market to play a decisive role in resource allocation and to support the government to play a better role. First, the market-based interest rate reform was deepened. While the control over deposit and loan interest rates were lifted in a sequenced approach, we have worked hard to foster a benchmark interest rate system for the financial market, to improve the market interest rate pricing self-discipline mechanism as well as the central bank interest rate adjustment and transmission mechanism, to facilitate the shift of monetary policy conduct from quantity-based to price-based adjustment. Second, market-based exchange rate regime reform was steadily furthered. Measures were adopted to support the decisive role of the market, to increase flexibility of the RMB exchange rate, and to enable market demand and supply to determine the exchange rate. As a result, the RMB exchange rate was basically stable at reasonable and adaptive levels and functioned as an automatic stabilizer. Third, the macro prudential policy framework has been established and improved. Improving the two-pillar framework of monetary and macro prudential policies has been written into the Report delivered at the 19th CPC National Congress. It is fair to say, that in macro prudential regulation, the People’s Bank of China and various regulatory authorities in China have been a world leader. In recent years, the People’s Bank of China has effectively conducted macro prudential assessment (MPA), and the macro prudential regulation over cross-border capital flow and the macro prudential regulation system for housing finance have functioned for a period of time while being improved on a continuous basis.
Second, we have further opened up the financial sector in a bid to enhance its competitiveness. Opening-up brings about progress whereas backwardness is the inevitable result of seclusion. The experience since reform and opening up has shown that the more a sector opens up, the more competitive it becomes; the more closed a sector is, the more likely it lags behind and accumulates risks continuously. Financial sector opening-up has the following three basic principles. First, pre-establishment national treatment and negative list shall apply to the financial industry, which ultimately is a competitive sector. Second, financial sector opening shall proceed side by side and in coordination with the exchange rate regime reform and progress towards capital account convertability. Third, equal emphasis will be given to opening-up and financial risk prevention and the degree of openness shall be aligned with financial regulatory capacity. If we follow these principles, we will be able to push forward the open-up. First, access restrictions have been eased. In 2017, the restriction on credit rating service by foreign-funded financial service companies was eased; the access policy on foreign-funded bankcard clearing institutions was made clear; the limit on foreign ownership in banks, securities and insurance firms was further eased. Market access will be eased further as part of series of reform measures. Of course, easing or lifting cap on foreign ownership does not mean no regulation. Foreign institutions will still be subject to the same prudential regulation as the domestic ones based on relevant laws in their access into and operation in Chinese market. Therefore, the easing of foreign ownership cap in essence means foreign institutions are treated as domestic institutions and subject to the same prudential regulation as domestic ones. Secondly, RMB internationalization has progressed steadily. The RMB was included into the SDR’s currency basket in October 2016. Meanwhile, the infrastructures for the cross-border use of RMB have been improved. The Phase 1 of Cross-border Interbank Payment System (CIPS) has come online and Phase 2 will become operational shortly. In the future, we will further open up the capital account in an orderly manner and facilitate the free use of RMB. Thirdly, two-way opening-up of the financial market has been enhanced. We have launched the “Bond Connect” in the bond market, and the “Shanghai-Hong Kong Connect” and “Shenzhen-Hong Kong Connect” in the stock market. Following the MSCI’s decision last June to include China’s A shares in its Emerging Markets Index starting June 2018, the Bloomberg LP announced on March 23 that it will add Chinese RMB-denominated bonds to the Bloomberg Barclays Global Aggregate Index. The foreign exchange market has been further opened up to overseas entities as well. At the next step, we will comprehensively implement the negative list system for market access and further open up the financial market in both ways.
The third task is to prevent and mitigate major financial risks and maintain overall stability of the financial sector.
The 19th CPC National Congress has specified 3 critical battles in the course of building a moderately prosperous society. Among them, the battle of preventing and mitigating major risks is at the top. Currently, the potential financial risks in China are reflected as following. Firstly, the risk of high leverage ratio on the macro level. The relatively high leverage ratio of the corporate sector, stubbornly high leverage ratio of some SOEs, implicit debt of the local governments and the surging leverage of the household sector all merit attention. Secondly, the issue of illegal fundraising, establishing financial institutions in violation of policies, illegal financial activities continue to stand out in certain industries and regions. For instance, the rapid expansion of unregulated shadow banking business has been contained but the stock is still quite large. Some entities conduct financial business without licenses and certain illegal financial activities develop rapidly in the name of financial innovation and internet finance. Thirdly, a small number of financial holding groups, with their savage growth, pose financial risks. Problems such as removing capital after injection, fraudulent or recycling of capital injection and transfer of interest through illegal connected transactions remain prominent, giving rise to risks spreading across institutions, across sectors and across financial markets.
We are on the alert for the potential damage of these risks. Yet, at the same time, we should note that the conditions are favorable to support the work of preventing and mitigating financial risks in China. First, the institutional advantages inherent in the socialist market economy with Chinese characteristics. Second, the solid material foundation accumulated during the 40 years of reform and opening-up. Third, we have rich experience in dealing with financial risks in a market-based approach governed by law. At the next step, we will continue to implement decisions and plans made by the CPC Central Committee and State Council, take solid measures to prevent and defuse major risks in accordance with laws and regulations, and resolutely hold the bottom-line of no systemic risks. Specifically, the first is to stabilize leverage ratio. The two-pillar framewor of monetary and macro prudential policies will be improved to strengthen macro prudential regulation and build resilience against systmeic risks. Vigorous efforts will be made to develop multi-layer capital market and steadily raise the share of direct financing. Multiple measures, including market-based debt-to-equity swap, mixed ownership reforms, direct financing, strengthening capital constraints and tightening regulation of off-balance-sheet activities and “channel business”, will be adopted to slow down the rapid growth of overall debt level and avoid accumulation of potential risks. The second is to deepen reforms in financial sectors and other key areas. We will implement the Plan on Deepening Institutional Reforms of the Party and the State, and deepen reforms of financial regulatory regime. We will also support reforms on fiscal and tax systems from the perspective of preventing systemic risks, and improve the new system for local government debt financing. Corporate governance in financial enterprises will be enhanced, and debt constraints for SOEs should be further emphasized. We will improve the real estate financial adjustment policy and push forward the establishment of a long-term mechanism for preventing financial risks. The third is to strengthen and improve financial regulation, and shore up weak links as soon as possible. We will emphasize the seriousness of financial regulation, optimize the regulatory forces, and strengthen regulatory enforcement. The guidelines on asset management business of financial institutions, guidelines on non-financial enterprises investing in financial institutions, and rules on financial holding company regulation, as components of the prudential regulation system, will be released in an accelerated manner. The forth is to take tough measures against illegal financial activities. We will pay more attention to the root cause of potential financial risks, strengthen access management in the financial sector, and crack down on unlicensed financial activities and operation of financial businesses beyond the liscenced scope. Without getting approval from financial regulators, no entity should provide financial services in any form.
This year marks the 40th anniversary of China’s reform and opening-up, and will be an extraordinary year. Against such a background, fulfilling the tasks in the financial sector is very critical and requires a lot of work. We will follow the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, grasp the new historic juncture in China’s development, focus our work around the evolution of the principal contradiction facing Chinese society, apply the new vision of development, promote high-quality development, implement a prudent and neutral monetary policy, steadily advance reforms and opening-up of the financial sector, work arduously to prevent and mitigate major risks, and maintain the stable and healthy development of the financial sector.