会议综述

Distinguished guests, ladies and gentlemen:

Good morning!

I would like to declare open the Seminar on Deepening Supply-Side Financial Structural Reform and the Annual Meeting of the National Institution for Finance and Development (NIFD) 2019. First, on behalf of the organizer, I would like to express my welcome and appreciation to all experts and scholars from various circles present at this event. Thank you for your care and support to the NIFD’s work over the years!

Since this year, the NIFD has implemented an annual meeting system and will host its annual meetings on April 1 each year. I look forward to your participation. I would also like to announce that we will set up another annual meeting since this year  - the Seminar on Fiscal and Monetary Policy Coordination. As you all know, the ultimate effectiveness of macro regulation is subject to the coordination between fiscal and monetary policies. Regretfully, such a big topic has never been formally and publicly discussed in academia over recent years. Only a few scholars made very emotional discussions from different stances. In my opinion, this lack of discussion is unfavorable to improving the efficiency of China’s macro-regulation policy. Of course, it is also unfavorable to the stability of China’s economic operation. Therefore, we at the NIFD have decided to set up this annual forum together with the Chinese Academy of Fiscal Sciences (CAFS) and the China Research Institute of Finance and Banking of the People’s Bank of China. “Coordination between fiscal and monetary policies” is an immensely broad topic that can be discussed regularly with new thoughts each time. For each year, we will determine the key topics of discussion and invite experts from across China and beyond to participate in our discussions. This year, we host the national seminar as the first step before convening an international conference next year. I encourage you to follow our announcements and look forward to your participation.

The theme of this year’s meeting is “Deepening Supply-Side Financial Structural Reform.” This topic was also the theme of discussions at the 13^th Collective Study Session of the Politburo of the CPC Central Committee chaired by General Secretary Xi Jinping in February of this year. In fact, General Secretary Xi Jinping has made a series of statements on financial issues over recent years related to this topic. It is necessary for us to make an integrated study on these statements. I believe that as China’s economy enters into the new era, “deepening supply-side financial structural reform” is a new direction of China’s financial sector reform and development in the new era identified by the CPC Central Committee. This policy direction is based on China’s domestic and international economic and financial situations over the past few years and four decades of financial reform and development experience. As an opening remark, I would like to share with you my thoughts on this topic for your consideration.

As part of overall supply-side structural reforms, China’s supply-side financial structural reform can be summed up as “one pillar, six directions.” “One pillar” refers to the important position of the financial industry in China’s economy. “Six directions” means the key areas that China’s future financial reform and development should focus on. Specifically, the “six directions” are: to serve the real economy, improve financial structure, manage financial risks, respect economic laws, develop fintech and increase opening up.

1. Financial Industry Plays an Important Role in the Economy

The important role of financial industry in the economy has been extensively discussed in academia. In my opinion, the recent statement by President Xi Jinping offers the most comprehensive and in-depth summary of the role of the financial industry. His statement highlights the following key messages:

First, finance is a country’s important core competitive strength. Here, finance is discussed under a global horizon and represents a core national competitive strength of pivotal importance.

Second, financial security is an important part of national security. This message highlights the key position of financial security in the national security system.

Third, the financial system is a fundamental system in economic and social development. This statement elucidates the relationship between the financial industry and a country’s economic and social development. It tells us that among various systems underpinning a country’s social and economic operations, the financial system plays an irreplaceable role and constitutes a foundation of a country’s development in all the other aspects.

I would like to draw your attention to a couple of statements in the Decisions of the CPC Central Committee on Major Issues Concerning Comprehensively Deepening Reforms adopted at the Third Plenum of the 18^th CPC Central Committee: “Finance is the foundation and an important pillar of national governance,” and “a science-based fiscal system is an institutional assurance for improving resource allocation, maintaining a unified market, promoting social fairness and achieving long-term national security.”

Putting together these statements on public finance and the financial industry, we may have the following interpretations: First, the financial industry and public finance constitute two pillars of a country’s development, and both of them are essential. Second, the financial industry and public finance should coordinate with each other since both of them jointly contribute to the economy, share “interwoven areas” as pointed out by Professor Huang Da a few decades ago, and form indispensable components of the macro regulation system. As mentioned before, we will launch another annual meeting within this year on the topic of “coordination between fiscal and monetary policies” based on such considerations.

2. Six Directions of Supply-Side Financial Structural Reform

2.1 Finance Should Serve the Real Economy

Almost everyone has a few words to say about how finance should serve the real economy, but overall, most people are not satisfied about the current situation. However, we have noticed that at the recent collective study session of the Politburo of the CPC Central Committee, President Xi seldom repeated those words that we often heard. He did not even mention the challenges of financing accessibility and affordability, which is often complained by many. I point this out to share with you the following observation: When President Xi talked about finance, financial risks and putting the financial industry at the service of the real economy, he always mentioned the real economy and finance in the same breath. Let us review his speech at the National Financial Work Conference in 2017, in discussing the problem of finance “shifting away from the real economy to the virtual economy,” he ascribed various problems in the financial sector to “three imbalances”: the supply and demand imbalance of the real economy, the internal imbalance of the financial industry, and the lack of smooth interactions between finance and the real economy. If you wish to unravel the relationship between finance and the real economy, I suggest that you carefully think about this statement. When talking about financial risks, he mentioned that such risks first reflect problems in the real economy, then problems in financial structure, and finally obstructions in the interactions between finance and the real economy. The message is clear: Finance is at the secondary position and can never exist in isolation of the real economy. Its problems cannot be explained in isolation of the real economy. In other words, it is superficial to identify financial risks and seek solutions to them within the financial circle alone.

President Xi’s important speech in February once again gave us a glimmer of his profound thoughts. Three statements in his speech are particularly thought-provoking: First, he mentioned that the “economy is the body and finance the bloodline; one cannot survive and thrive without the other.” This statement on the relationship between finance and the real economy draws a new analogy - the relationship between bloodline and the body. In the past, we often described finance as the pivot of the economy - an analogy that remained in an inorganic state. But now, we can describe the relationship between finance and the real economy as one between the bloodline and the body, which is an organic relationship and apparently a more vivid analogy. The second statement is that “thriving finance leads to a thriving economy; financial stability leads to economic stability.” The third statement is that “economic prosperity promotes financial development; a strong economy begets a strong finance.” Statements of such elaborate symmetry evoke an impression of careful deliberation and wording and are thought-provoking. I would like to offer my own interpretation. The second statement starts with finance and is concerned with the relationship between prosperity and stability of finance and the economy, from which it can be seen that finance is of secondary position to the economy and plays a supplementary role. The third statement starts with the economy and deals with the development and strength of the economy and finance. Obviously, it underscores that the economy determines financial development and strength and plays a primary and fundamental role. Behind these new statements are profound theoretical considerations. I believe that the three statements put together constitute a complete policy statement on putting finance at the service of the real economy. No matter how you further elaborate and explain the statements in specific domains, the overall theoretical considerations, principles and directions must be followed and kept in mind. Therefore, I consider that the statements on the relationship between finance and the real economy are a key aspect of China’s strategy on the supply side financial sector reforms as they elucidate the intricate relationship between finance and the real economy.

2.2 Improving Financial Structure

Great importance has been attached to improving financial structure due to the distortions and mismatches in China’s current financial structure.

The first mismatch is maturity mismatch between raised funds and loans. Based on China’s current financial structure, the maturity of raised funds is relatively short, while China’s present development stage and tasks require a longer maturity of loans. The mismatch between the short maturity of raised funds and the long maturity of loans is one of the distortions. It is true that maturity mismatch is a common challenge facing the financial systems of all countries. Yet this mismatch is particularly striking in China, a developing country still undergoing industrialization and making great efforts to urbanize. In such a historic stage of development, our demand for long-term capital is stronger than any other country. Based on China’s current financial structure, however, the maturity of our funding sources is relatively short. As a result, overcoming maturity mismatch has become a long-term and arduous task. In the face of downward economic pressures, the CPC Central Committee reaffirmed the critical role of investments when identifying priorities for 2019 and beyond. In addition to “manufacturing technology renovation and equipment upgrade and 5G commercialization,” the 11 key areas of investment also include artificial intelligence, industrial internet, IoT and other types of infrastructure, as well as public service infrastructures and natural disaster prevention and response capabilities. All these priorities require long-term investments of tremendous amounts. Given the downward economic pressures, it is all the more urgent to address the maturity mismatch between capital source and capital use.

The second mismatch is equity mismatch. Over the past few decades and especially since reform and opening up in 1978, China’s financial system has developed from scratch and experienced explosive growth - such growth led to an unremitting source of tremendous savings and supported strong investment and growth momentum that lasted for decades. Yet under China’s current financial structure, most funds that have been raised may only form the liabilities of borrowers, and only a small proportion of funds could form the capital and equities of fundraisers. This is what I mean by equity mismatch. Amid China’s rapid economic growth, quantitative expansion gave rise to a shortage of funds, which was a prominent issue in China’s economic operation that overshadowed the equity mismatch as a less evident problem. But as China’s economy entered into the new normal of medium-low growth and downward pressures started to mount, the shortage of equity capital has become more apparent. Excessive liabilities, leverage ratio and cost of capital which give us a lot of headaches are all related to the equity mismatch of China’s financial structure.

The third mismatch is the mismatch of service recipients. So far, our finance still primarily serves the rich and big business. For people of middle income and below, for numerous small, medium-sized and micro businesses, and for private economic entities which are in dire need of capital and financial services, the services that we provide significantly fall short of their needs.

Improving financial structure, therefore, entails correction of above-mentioned distortions. The directions of reform can be summarized as follows.

First, to improve the system of financial institutions with a reasonable division of labor and mutual complementarity among commercial finance, development finance, policy finance and corporate finance. The goal is to build a multitiered and differentiated banking system with a broad coverage.

The Third Plenum of the 18th CPC Central Committee has already made arrangements on improving the system of financial institutions of the four types. Regretfully, these arrangements made six years ago are yet to be effectively implemented. In my opinion, the identification of financial activities of the four types with equal importance marks a major innovation in the new era with new priorities. In a long future period, the market-based reforms and commercialization of the financial system will remain key directions and basic priorities of China’s financial reform; the so-called policy finance was once discarded by us. After numerous setbacks, cooperative finance still faces many difficulties in China. As for development finance, it is merely a new product of China’s rapid industrialization. We still have a long way to go before we can achieve the goal of building a multitiered and differentiated banking system with a broad coverage. We have made numerous attempts to develop our financial system from the grassroots level by creating credit unions, village and township banks, small credit, and so on and so forth. Nevertheless, China’s financial sector today is still dominated by big banks. A more serious problem is that regardless of their size and position, all banks have highly homogeneous business structures. In this sense, the goal to develop diversified financial institutions is targeted at the defects of China’s financial structure.

The second direction is to “develop a standardized, transparent, open, vibrant and resilient capital market, improve fundamental capital market systems, enforce proper control on market entry and exit, and enhance all-round supervision on financial transactions.” In recent years, capital markets have received increasing attention from national macroeconomic regulators. But we have also noticed some changes in the priorities of capital market development. This time, there seems to be little discussion about the importance to develop multitiered capital markets and raise the percentage of direct financing. Instead, priority was given to the institutional development of capital markets. The central government has attached unprecedented importance to developing fundamental market systems, enforcing proper control on market entry and exit, and enhancing all-round supervision of financial transactions.

The third direction is to “develop individualized, differentiated and customized financial products based on market demand,” which is a meaningful statement. As we know, individualization, differentiation and customization are closely related to something that developed very fast but very controversial in recent years - which is wealth management. Individualization, differentiation and customization represent trends toward non-standardization, which correspond to off-balance sheet, OTC and disintermediation. Financial products in China exhibit a significant trend toward non-standardization over recent years. Yet untimely and inadequate regulation has coexisted with regulatory loopholes and overlaps. Improper regulation plus leveraged financing in the capital markets have led to massive risk accumulation in the wealth management sector. In such a context, it makes sense to bring order to the wealth management business. Nevertheless, the shift of funds from off-balance sheet back to the balance sheet, from OTC back to exchanges, from diversification to simplification, and from capital markets to the balance sheets of banks only represents an expediency for the sake of risk mitigation. In the end, financial products should develop toward individualization, differentiation and customization.

In adjusting product structure, we should also increase the number and percentage of small and medium-sized financial institutions, improve financial services for small and micro businesses and for agriculture, the countryside and farmers, and support private enterprises experiencing temporary difficulties so long as they meet national industrial policy with primary business in the real economy and boast advanced technology and real market potentials. The fact that this task was identified by the government as a priority has a lot to do with the operational difficulties facing small and micro businesses and private enterprises over recent years. In deepening reforms, policymakers must bear in mind the need to help struggling businesses.

2.3 Managing Financial Risks

In reading the central government’s latest statements on financial risk management, we are again struck by President Xi’s insights on the relationship between finance and the real economy and between financial development and financial risks. He first emphasized that preventing and resolving financial risks, particularly systemic financial risks, is the fundamental task of financial work. This message defines a basic element of China’s financial reform and development.

Regarding financial risk mitigation, we need to grasp the implications behind the following statements:

First, “healthy development of the real economy is the foundation for preventing and resolving risks.” This message represents President Xi’s consistent reasoning: When it comes to financial risks, we should firstly look at risks of the real economy which receives its services. At the fundamental level, financial health is predicated upon the health of the real economy. In other words, finance will not thrive without a strong real economy. A weak real economy cannot require unrewarded financial services. With this understanding, we may offer a more comprehensive explanation on why it is difficult and costly for businesses to get financing.

The second message is that “attention should be given to preventing risks while maintaining growth stability.” This message has to do with the relationship between mitigating financial risks and stabilizing growth. Obviously, growth stability should have the priority, and financial risks should be managed on the basis of a stable real economy.

The third message is that “we should prevent and resolve risks in the course of promoting high-quality development.” This message is about the relationship between development and risk mitigation, putting premium on the prevention and resolution of financial risks through high-quality development.

In summary, I believe that the three statements on keeping financial risks at bay are new statements with meaningful implications as they involve the relationship between finance and the real economy, the relationship between financial development and financial risks, and the relationship between economic development and financial risks. These relationships constitute key elements of China’s financial reform and development.

Management of financial risks should be carried out in the following five directions:

First, we should expedite development of financial market infrastructures and the nationalization of critical financial information infrastructures. This statement reaffirms the importance of financial market infrastructures. However, given changing economic and financial situations in China and overseas, particularly rising trade frictions between China and the U.S., we need to put premium on nationalization, by which I mean that financial security should be elevated to a core aspect of national security.

Second, we need to develop consolidated financial sector statistics, improve information system that timely reflects risk volatility, improve management rules for information disclosure and enhance credit discipline. In recent years, the NIFD has been committed to following and analyzing various risks in China and overseas and issuing quarterly reports. I encourage you to follow us. 

Third, we should enforce oversight on the people and money and build an institutional firewall. Over the past few years of China’s anticorruption campaign, we have found that almost all corruption cases were related in some way to finance, or ended up in the financial sector, or were triggered by certain financial events. Therefore, we must enforce proper oversight on the people and money and build a solid institutional cage to keep power in check, which is of great significance to the fight against corruption.

Fourth, modern technologies, payment and settlement mechanisms should be employed to monitor the directions and volumes of both online and off-line, domestic and international capital flows, so that all capital flows will be brought under regulatory horizon. Oversight on payments, settlements and capital flows, which used to receive little attention, has now become an issue of national security. The NIFD has always attached great importance to research on payments, settlements, and capital flow volume and inventory. These commitments are manifested in the China National Balance Sheet 2018, which we are glad to present to you today, as well as our previous study of Where Did Money Go and China’s capital flow statements and capital inventory statements, domestic and international capital market updates, domestic and international financial risk evaluation, together with fintech developments. We are delighted to see that such fundamental research, which used to be regarded as dull and dry, is now given a place it deserves. 

Fifth, deleveraging. As we know, the very source of financial risks lies in the high leverage ratio. For this reason, deleveraging is our long-term task. Due to adjustments in deleveraging priorities, strategies and pace, some people groundlessly asserted that China’s deleveraging operations came to a close. With a closer look at the level and changes in China’s overall and sector-specific leverage ratios, particularly the relationship between China’s high leverage ratio and its traditional pattern of economic development, one will come to realize that in China, deleveraging has become a long-term task that takes a long time to complete. Please recall the important relationships that I mentioned before. Namely, in the relationship between stability and risk mitigation, stability comes first; in the relationship between high-quality development and risk mitigation, high-quality development comes first. Having understood the dominant factors in these relationships, we will calmly assess the relative position of deleveraging in macro regulation. That is, deleveraging is a risk mitigation operation, which serves financial stability, economic stability and high-quality development. From another angle, however, since high leverage ratio has become the origin of almost all financial risks, we must remain vigilant and deleverage on a long-term basis. In a word, deleveraging has become a more arduous and long-term task and is far from coming to a close.

2.4 Respecting Economic Laws

Respecting economic laws essentially means to advance reforms along the path of building socialist market economy and correcting all institutional mechanisms that go against this goal. Under this direction, we should pay particular attention to progress in the following three aspects:

First, we should improve the market-based renminbi exchange rate formation mechanism, expedite interest rate liberalization, and improve the treasury bond yield curve that reflects market supply and demand. In fact, the liberalization of exchange rate, interest rate and treasury bond yield rate, or the “three rates,” was identified at the Third Plenum of the 18th CPC Central Committee back in 2013. Regretfully, little progress has been made so far. We must come to realize that exchange rate liberalization concerns whether we will be able to make effective use of domestic and international markets, that interest rate liberalization concerns whether we will be able to effectively allocate limited resources to the most efficient areas, regions, sectors and enterprises, and that the improvement of treasury bond yield curve concerns the reasonable and science-based pricing of financial products in our country. We often say that in the market economy, it is the market forces that guide resource allocation, but the question is what guides the market? It is the flow of finance, but what dictates the flow of financial resources? It is dictated by information revealed from the “three rates.” Importance of liberalizing the “three rates” goes without saying. Like it or not, we still have a long way to go before completing the liberalization of the “three rates.”

Second, another thing to do in the name of respecting economic laws is to remove the ownership and ideological preferences of the financial system, follow the “competition neutral” principle, and offer financial services to firms of all ownership types equally. As we know, the “competition neutral” principle was mentioned for the first time by the Governor of the People’s Bank of China Yi Gang at a press conference with foreign journalists. By the end of 2018, the Central Economic Work Conference put forward the concept that “competition policy has a fundamental position.” The Government Work Report delivered at China’s legislative annual session this year and Premier Li Keqiang’s speech at the Boao Forum for Asia have both called for implementing the competition neutral principle. The implication is that this principle will become a direction in China’s deepening of reforms in various fields. Once competition neutrality is achieved, difficulties facing China’s small, medium-sized and micro businesses and private enterprises will be solved. 

Third, we must enhance the development of financial infrastructures, including a complete set of registration, custodianship, transaction, clearing and settlement systems, together with the laws and regulations that standardize and protect the operation of these systems. All these infrastructures are basic conditions for normal market operation, and reforms should be carried out proactively in these fields.

2.5 Developing Fintech

Fintech development has been widely discussed by government leaders and appears in various reports and policy statements. Fintech development will greatly improve the factor basis and structure of China’s economic and financial development with higher quality.

First of all, we should be aware that the development and commercialization of science and technology have always been key elements and priorities of supply-side structural reforms. They are the foundation for implementing new development concepts and achieving innovation-based development. In the financial sector, supply-side structural reforms require vigorous fintech development to turn innovation into a fundamental driver for changing financial service supply structure and improving efficiency.

Fintech is poised to revolutionize the financial industry in following ways: (a) It helps address the dilemma of information asymmetry that has always troubled financial development in China. (b) Fintech provides more reliable credit basis to support financial system operation. (c) Fintech tracks the flow of factors and facilitates financial services to the real economy. (d) Fintech reveals the preferences of various sectors and entities, which provide valid parameters for resource allocation. (e) Fintech reduces the cost of financial services and effectively connects with ordinary people and small and micro businesses. It should be noted that fintech is not a technology itself and is essentially a vehicle of finance. Fintech companies must accomplish the above-mentioned five goals in order to survive when the bubble bursts. In recent few years, we have seen some bubble accumulating in this sector and should be highly alert about it. We do not want to see fintech, which has been making a lot of progress, to repeat the mistakes of internet finance.

We must recognize that highly advanced fintech is the sine qua non for real development of inclusive finance and green finance that benefit the people.

2.6 Increasing Openness

Opening up the financial sector has been an old topic. What new messages did President Xi mention in his latest speeches? 

First, increasing openness not only entails a higher level of openness, but brand-new reform and opening-up initiatives in accordance with changing international economic and financial situations and China’s strategic development priorities. That is to say, financial openness should be targeted and problem-oriented. We cannot increase openness simply for openness’s sake. This is a basic principle for China’s financial openness.

Based on this principle, we have identified three priorities, for “three improves”:

First, China should enhance its financial sector’s global competitiveness and promote two-way financial openness at a higher level. I wish to remind you again that when it comes to supply-side financial structural reform, President Xi has set his eyes on the overarching strategy of integrating China into the global financial system, which is a strategic arrangement of putting China into the global context. In this sense, the financial sector’s openness is a means to enhance our global competitiveness. Two-way financial openness and attraction of foreign capital are elements of such a strategy.

Second, China should enhance its economic and financial management and risk resilience under open conditions. In the context of globalization, our concern is that once we open up our financial market, we will introduce new things that we have not heard of or are unfamiliar with. We lack experience in managing an increasingly complex financial world. Therefore, enhancing economic and financial management capabilities and risk resilience becomes more important than ever.

Third, China should enhance its capabilities to participate in international financial governance. In my impression, this is a strategic objective that China has identified for the first time. China’s economy and finance are increasingly interconnected with the world economy and finance, giving rise to a new world pattern of shared interests. With China’s growing economic prowess, it becomes not only necessary but also possible for China to take part in global financial governance, express its views and stances, and safeguard its interests and those of other developing countries.

These are some of my thoughts on China’s supply-side financial structural reform, and I welcome your comments and suggestions. Thank you!