Road map for financial reform
TEditor’s note: The author, the governor of the People’s Bank of China, outlined the government’s proposed financial reform plans in his recent article in People’s Daily. The following is the second part of an excerpted translation. The first part was carried by China Daily on Dec 11.
Making steady efforts to push forward marketized reforms of the country’s exchange rate and interest rate mechanisms
o give the market a decisive role in the distribution of resources calls for the establishment of a market-dominated pricing mechanism and its improvement, so that the market can enjoy a free hand in deciding prices while undue interventions from the government can be reduced. As an important part of the factor market, interest and exchange rates are a determinant in the distribution of domestic resources, steadily pushing forward market-based interest and exchange rate reform will help China optimize and raise the efficiency of its distribution of funds, further strengthen the market’s decisive role in the distribution of resources and accelerate the transformation of the country’s economic development model and structural adjustments.
1. To make improvements to the marketized RMB exchange rate formation mechanism.
Continuous efforts will be made to improve the marketized RMB exchange rate formation mechanism, give market supply and demand a fundamental role in the process, raise the distribution efficiency of domestic and foreign resources, and promote a balance in international payments. Measures will be taken to develop the country’s foreign exchange market, enrich its foreign exchange products and extend the market’s breadth and depth to better meet the demands of corporations and individuals.
According to the country’s foreign exchange market conditions and its economic and financial conditions, measures will also be taken to increase the two-way fluctuation elasticity of RMB exchange rates to ensure that its exchange rates can basically maintain a stable level. At the same time measures will be taken to further give the market-based exchange rate a bigger role and promote the basic departure of the country’s central bank from regular exchange rate interventions, to the setting up of a managed floating exchange rate system based on market supply and demand.
2. To speed up efforts for interest rate marketization.
While adhering to the interest rate formation mechanism based on market supply and demand and making improvements to the market-based interest rate system and interest rate transmission mechanism on the basis that the central bank’s macro-regulation capabilities can be enhanced, efforts for interest rate marketization will be speeded up. In a move to boost the self-pricing capability of domestic financial institutions, measures will be taken in the short term to improve the self-disciplining mechanism for interest rates pricing in the near future. Measures will also be taken to push forward interbank deposit certificate issuance and trading, in a bid to gradually expand the market-based pricing range for debt products issued by domestic financial institutions. In the short or mid term, measures will be adopted to cultivate a relatively developed market interest rate system and make improvements to the framework of the central bank’s regulation over interest rate and its interest rate transmission mechanism. As a mid-term goal, efforts will also be made to realize a full interest rate marketization and put in place a sound market-based interest rate macro-control mechanism.
3. To perfect the bonds yield curve that can reflect market supply and demand.
The yield curve of government bonds, as the main fixed-income market return ratio, is a reflection of risk-free benchmark yields distributed within all kinds of time limits. Currently, some improvements are yet to be made to China’s government bonds yield curve in terms of its accuracy, authority and completeness. As China’s macro financial regulations change from quantity-dominated to prices-dominated and with the continuous advancement of its marketized interest rate reforms, the country needs to improve its government bonds yield curve and give the curve a bigger role in the distribution of its financial resources. In view of this, measures will be taken to improve the mechanism of government bonds issuance and optimize its maturity structure. At the same time, measures will be taken to further enrich the investor type, steadily raise the opening-up of the country’s government bonds to home and abroad and increase the demand for transactions.
Accelerating steps to realize the convertibility of RMB capital account
To push for RMB capital account convertibility is an essential requirement for building an open and new economic system. Its fundamental aims are to make trade and investment more convenient and create conditions for the expansion of outbound corporate and individual investment. It also remains a requirement for further developing various kinds of cross-border financial business, implementing the idea that the financial sector should support the real economy, promote the implementation of the country’s “go global” strategy and accelerate its economic structural adjustments and industrial transformation and upgrading. The country should seize the favorable window emerging for promoting RMB capital account convertibility and speed up the target’s realization on the basis of the overall domestic demands and international situations facing the country.
1. To change the management manner of cross-border capital flows to facilitate the implementation of the “go global” strategy.
Measures will be taken to push for the further transformation of the country’s foreign exchange management manner to make outbound investment more convenient. Current administrative examinations and approvals in the foreign exchange management will be reduced to promote a shift from focusing on rigid administrative examinations and approvals to focusing on monitoring and analysis, from focusing on micro control to focusing on a prudent macro management, from focusing on positive lists to focusing on negative lists. Measures will also be taken to make it more convenient for enterprises to implement their “go overseas” strategy and gradually make it easier for domestic enterprises to offer to overseas ones RMB and foreign currencies credit and financing guarantees.
2. To push for two-way capital opening-up and raise the degree of cross-border capital and financial transaction convertibility in an orderly manner.
Practical measures will be taken to further expand the qualification range of qualified domestic institutional investors and qualified foreign institutional investors and increase investment quotas. The qualification and quota examination and approval for QDII and QFII will be cancelled when conditions are ripe, and steps will be taken to extend investment conveniences to all legitimate institutions at home and abroad. Studies will be made into establishing a connectivity mechanism between domestic and overseas stock markets and to gradually allow qualified foreign companies to issue shares in the domestic capital market to widen investment channels for domestic residents. Under the condition that a management system is set up, the qualification limitations on the domestic issuance of RMB bonds by foreign institutions will be relaxed. At the same time, measures will be taken to increase the convertibility of individual capital accounts, make it more convenient to undertake direct investment, direct investment liquidation and credit convertibility, and promote managed convertibility for financial derivatives trading.
3. To set up and make improvements to a foreign debt and capital flow management system under a prudent macro-management framework.
Efforts will be made to establish and improve a prudent macro-policy framework targeted at foreign debt and capital flows to raise the country’s risk control capability at a time of capital convertibility. After matching conditions between the currency category of assets and liabilities and their terms are taken into comprehensive consideration, reasonable regulations will be exercised over the scale of foreign debts to optimize their structure, put in place effective monitoring and prevent foreign debt risks. Measures will be taken to strengthen anti-laundering and anti-financing management to ensure that a high-handed policy is in place over the cross-border flow of illegal funds and prevent excessive exploitation of tax havens. Monitoring over short-term speculative capital flows, especially the trading of financial derivatives, will be strengthened.
While encouraging reasonable financial innovations, measures will also be taken to limit the development of complicated financial derivatives that seriously deviate from the real economy to keep financial innovation in line with serving the real economy. At the same time, reforms of the country’s monitoring regime over financial derivatives will be made in accordance with latest international standards. Some measures will also be taken for temporary management of capital flows in case of an emergency. At the same time, a sound monitoring system will be set up to facilitate cross-border capital flows and the unified collection of effective information.