A modern financial system set to fortify China’s global competitiveness
Financial policy in China recently made waves as the People’s Bank of China (PBC), the central bank, decided to cut the reserve requirement ratio (RRR) of all financial organizations by 50 basis points. This decision, effective on February 5, aims to release approximately one trillion yuan of long-term liquidity to bolster monetary market and economic growth.
On the heels of the announcement, China’s stock markets, including the bourses in Shanghai, Shenzhen, Beijing and Hong Kong, all staged stellar rallies during the last three trading sessions. This significantly boosted market morale and public confidence in the country’s bright future.
China’s top leadership recently convened an important financial work conference in Beijing, attended by nearly all ministerial-level officials, to chart a course on comprehensively strengthening the country’s financial sector. By all metrics, building a financial powerhouse in China is imperative and in synergy with the country’s current position as the world’s largest manufacturing base, important technology innovator, and unparalleled trade power.
China’s economic development in the coming years requires strong support from the financial sector, both in terms of monetary policies and financial services. That explains why the financial work conference called for intensified efforts to phase in an effective and fullfledged financial management structure, oversight regime and financial service system, in addition to building a strong and well-managed capital market.
The financial policy loosening, in the form of the 50-bps RRR cut by the central bank, was widely expected by market investors in the wake of the conference. And more and even bolder monetary and fiscal stimulus measures are expected to be worked out this year to accelerate China’s economic growth, probably in early March when the annual National People’s Congress and Chinese People’s Political Consultative Conference, commonly referred to as the “two sessions,” will be held in Beijing.
It’s suggested that China should aim for a relatively high growth rate, in the range of 5 percent in annual GDP expansion in 2024 and 2025, in order to create a larger pool of social wealth that could benefit hundreds of millions of ordinary Chinese families, support fiscal spending in urban and rural infrastructure, education, medical care, elderly pensions, national defense, scientific research and technology innovation, as well as the Belt and Road Initiative and other important programs. Also, a higher growth rate could help generate crucially-needed jobs for unemployed young people.
The financial work conference by the leadership also emphasized the need for building a modern financial system with Chinese characteristics. A modern central bank would be able to grasp live pulse of the economic activity, including price variations and subtle changes in employment situation, keep abreast of global economic ups and downs and international financial market trends. The central bank should be proactive in adjusting monetary policy to prevent any emerging risk of inflation or deflation, and should work to minimize the impact of offshore financial crises.
It is believed that the PBC still has a good policy maneuverability room to prop up the country’s economic development. The Central Bank Governor Pan Gongsheng, during last week’s press conference, announced the RRR cut. China’s central bank has more means at its disposal to propel the economy.
Financial strength enables growth. In 2024, China has the financial capacity to accelerate economic growth as Chinese banks are now holding a massive pool of savings equal to 288 trillion yuan ($40 trillion) across all types of entities and Chinese households, according to a report from the
State Council Development Research Center. The country can tap into this wealth to accelerate investment on a wide array of fields, such as AI and semiconductors. Building up financial strength is crucial for China’s long-term success. The Chinese economy has demonstrated remarkable resilience in 2023, recovering from the three-year pandemic crisis.
As we enter 2024, the economy, supported by a significant tick-up in government spending programs and easier bank loans enabled by the central bank, will most likely gain new momentum and keep forging forward, acting as a major engine of the Asia-Pacific region and the global growth despite persistent volatilities and the “decoupling” and de-globalization headwinds in the world.