Road map for financial reform

IEditor’s note: The author, the governor of the People’s Bank of China, outlines financial reforms in his recent article in People’s Daily. The following is the first part of an excerpted translation. n a move to push for improving China’s modern market system, the Third Plenary Session of the 18th Central Committee of the Communist Party of China has drawn up a road map for comprehensive and deepened reforms.

As the core of a modern economy, the financial sector is at the heart of China’s socialist market system. To do a better job in the financial sector in the future, the country should firmly hold on to the essential principle that the financial sector should serve the real economy, adhere to the reform direction that the market dominates the distribution of financial resources, and stick to a development concept that prioritizes coordination between innovation and oversight.

In line with the plenum’s mapped program, we need to comprehensively push for reforms, opening-up and development, and accelerate the establishment of a safe, sound and modern financial market system with a broader range of services, a reasonable structure and greater efficiency.

A more competitive and inclusive financial services sector

Efforts will be made to expand the opening-up of the domestic financial sector, and, under the precondition of strengthened financial supervision, small-and medium-sized banks and other private financial institutions will be allowed to enter the market. 1. To expand financial opening-up. Efforts will be made to both raise the country’s capabilities in the distribution of financial resources, so they cover a wider range and are at a higher level, and boost the quality of its financial services. Efforts will also be made to strengthen the competitiveness of domestic financial departments and promote the cross-border use of the RMB, as well as the establishment of an international financial center to push for China’s economic transformation and structural upgrading. Measures will be taken to further expand the opening-up of the financial sector and gradually follow the new opening-up model that entails pre-establishment national treatment and negative lists and the promotion of a high-level opening-up of the domestic financial services sector.

2. To allow for the establishment of financial institutions by private capital under the condition of strengthened oversight.

Based on the principles of equity, openness and transparency, a unified market access system will be adopted to encourage and guide the flow of private capital to financial services. As a service sector with fierce competition, the financial sector should, in accordance with the negative lists market access system and the requirement for services expansion, provide a market environment for equitable competition and the entry of various kinds of investors. To allow qualified private capital to set up small-and medium-sized financial institutions when strengthened oversight is in place will create the supply of necessary and competitive financial products to the real economy, which will help some local regions and small-and micro-sized enterprises ease their fund shortages. 3. A modern financial corporate system. Measures will be taken to further improve the governance capability of State-owned financial institutions, relax limitations on the entry of private and foreign capital to the financial sector and optimize its equity structure. A more market-oriented hiring mechanism will be adopted to reduce administrative appointments. A benign incentive mechanism for management will be set up to ensure that realizing shareholders’ interests is the main goal of senior management. Measures will also be taken to improve the corporate governance of domestic financial institutions, to form an effective decision-making, enforcement and balancing mechanism that can implement corporate governance measures in their daily operations, management and risk control. Meanwhile, standardized and effective incentive and restraint mechanisms, including a salary system, will be established. 4. To develop a financial system beneficial to all. A financial sector that prioritizes improvements in people’s livelihoods should be set up to meet their ever-growing financial needs. The fruits of financial reforms and development will be extended to all regions, poor ones in particular, and to all groups, to promote the sector’s sustainable development. The limitations on market access will be moderately relaxed to support the development of small-sized financial institutions. Policy guidance will be strengthened to encourage domestic financial institutions to extend support to the weaker sectors necessary for national economic and social development. Vigorous efforts will be made to develop multiple financing methods, standardize the development of the private lending and borrowing business and expand diversified financing channels for small- and micro-sized enterprises. Innovative financial products and tools will be encouraged to continuously expand the coverage of financial services. Measures will also be taken to strengthen the construction of financial infrastructure and improve the modernization level of financial services. At the same time, the building of a credit system will be pushed forward to further optimize the environment for the provision of financial services to small-and micro-sized enterprises, strengthened protection of consumers’ rights and the raising of their financial awareness.

A multi-layer capital market system will be built

Efforts will be made to raise the country’s direct financing proportion, push for reforms of the stock issuance registration system, promote multi-channel equity financing, develop and standardize the domestic bond market, as well as improve insurance market and encourage financial innovation. 1.To raise the ratio of direct financing. Vigorous efforts will be made to push for the transformation of the country’s economic development mode and economic structural adjustment, and develop the stock, bond and other capital markets. There will also be vigorous efforts to expand the direct financing channels for enterprises and to optimize the structure of social financing. The market-oriented reform direction will be continued to reduce unnecessary administrative regulations, spark market motivation and its intrinsic vitality, and to cultivate commercial credit. Under the condition of respecting market principles, vigorous efforts will be made to boost various kinds of institutional investors in order to promote the diversification of the domestic financial market, products, investors and intermediaries. The concept of standardized development will be maintained to strengthen market restraint and the risk-sharing mechanism and further boost the transparency of market operations. At the same time, measures will be taken to promote the establishment of a sound framework of laws, financial regulations and oversight, as well as the adoption of sound financial and taxation policies.

2.To push forward reforms of the stock issuance registration system.

Based on full information disclosure, measures will be taken to reduce the administrative examinations and approval process for the qualification of share issuers. Measures will also be taken to strengthen the flexibility of the stock issuance system to reduce costs and increase financing efficiency. Efforts will be made to strengthen ongoingevent and post-event oversight and improve the current civilian and criminal accountability system to effectively check fraud in the listing process. Further improvements will be made to the current exit system for listed companies to raise the quality of listed corporations through the elimination of those that are not qualified. There will be crackdowns on malpractices, such as false statements, market rigging and insider dealings, and stronger market restraints and credit restraints on listed companies and intermediary agencies to protect the legitimate rights and interests of investors and to ensure the openness, equity and justice that the stock market desperately needs. 3.To push for multi-channel equity financing. While continuously improving various stock exchange bourses, continuous efforts will be made to push for the construction of a multi-bourse equity market. Under a unified institutional framework, all provinces, municipalities and autonomous regions will be able to set up equity markets that are suitable for the local economic development conditions. Measures will be taken to guide private equity investment and venture capital investment to support the equity financing of innovative and growth enterprises. At the same time, differentiated institutional arrangements and a unified registration platform will be set up to push for the formation of an organic equity market system. 4. To develop and standardize the bond market. Measures will be taken to steadily expand the scale of the domestic bond market, push for the innovation and diversification of financial products and increase the securitization of assets. Explorations will also be made into municipal bonds to improve the financing mechanism for urbanization. At the same time, measures will be taken to develop collective bonds, private bonds and other financing tools to expand enterprises’ financing channels and increase the financial support to the real economy.

5. To improve economic compensation mechanism and set up a catastrophe insurance system.

Measures will be taken to push forward the legislation for catastrophe insurance, define the range of catastrophe insurance and set up a governmentdriven, market-operated and risk-sharing, multilayer catastrophe insurance system. Government and market roles will be defined to encourage the involvement of commercial insurers in majordisaster insurance.

6. To encourage financial innovation and enrich the financial market strata and products.

An innovation-driven development strategy will be adopted to steadily push forward innovation of the domestic financial market mechanism. There needs to be a long-term innovation mechanism for its organization, products and services. At the same time, risk-prevention measures will be put in place from the very beginning to balance innovation, development and risks and prevent innovations that aim to evade financial oversight and deviate from meeting the demands of the real economy.

7. To strengthen construction of financial infrastructure and ensure safe and efficient operation and stability of the domestic financial market.

Active and prudent measures will be taken to implement the principles of relevant international organizations and strengthen the construction of China’s financial infrastructure. Efforts will be made to push forward the building of a trade information reporting system and other facilities to improve systems for the registration of financial products, trusteeship, trading, clearing and settlement. Efforts will also be made to promote more efficient information processing and transmission among these systems and supervisory organs.