Road map for fi­nan­cial re­form

China Daily (Hong Kong) - - COMMENT - ZHOU XIAOCHUAN

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.

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