China to unfold financial reform next year

“2016 will mark an important year for China’s financial reform,” many industrial insiders interviewed unanimously expressed this opinion.

China’s leadership repeatedly warn on financial risks

A few years ago, when China’s economic growth started to decline, economists had suggested including financial risks prevention as a key part in macroeconomic adjustment. Though government’s ability on financial control has improved over the years, adjustment in this sector is never easy in light of the changing market condition at home and abroad.

Since June this year, China’s stock market has experienced constant and sharp volatility. Conflicts and problems accumulated over the years, which limited normative development and financing function of the stock market, have exposed. China’s leadership have noticed this problem and begun to pay greater attention to the development of the capital market and prevention of financial risks.

While instructing the drafting of the “13th Five-year Plan” proposal, President Xi Jinping pointed out that in the past few months, frequently exposed partial risk, particularly violent fluctuations in the capital market, indicated that existing regulatory framework cannot tackle systematic problems occurred in China’s financial industry development, and it again remind us that we must carry out reform to safeguard the financial security and effectively prevent systematic risks.

As the most sensitive sector in the economy, stable financial system is of great importance to the overall economic situation. Liu Yuanchun, executive director of the national development and strategic research institute of Renmin University, believes that if risks are not controlled effectively, it will bring huge impact on China’s economic restructuring and recovery. “Strong fluctuations of the stock market earlier have obviously put off the progress of de-leverage”.

Zhao Xijun, deputy director of the finance and securities institute at Renmin University, also believes that risk prevention is top priority for the year, because the development of real economy, industrial structure upgrading, the advancement of entrepreneurship and innovation, preservation and appreciation of household wealth all require financial supports from a sound and healthy capital market.

So far, competent departments have already started research and deployment works. Investigation group of the Central Finance and Economy Leading Team Office (CFELTO) went to Zhejiang Province for investigation from Nov.10 to Nov.11. Liu He, director of CFELTO, indicated on economic symposiums of certain provinces that [relevant departments] should take precautions against and reduce financial risks, boosting healthy development of the capital market.

On the symposium of presidents of PBOC branches, the PBOC came up with establishing and improving risk early warning, identification and disposition mechanism and restoring stability to financial market, to effectively prevent and reduce financial risks.

Zhou Xiaochuan, governor of the PBOC, published an article on People’s Daily, which said as China’s economic growth has switched from high speed to high-middle speed, structural conflicts and systematic problems previously covered by high speed growth begin to emerge, and we face severe challenges to practically prevent and resolve financial risk in the next five years.

Financial reform is a major task for the coming year

To some extent, increasing financial risks, combined with the development of capital market and internationalization of RMB, are forcing China to strengthen financial system construction. Many professionals of the industry anticipated that 2016 will be a very key point for China’s financial reform.

Zhou wrote in the aforesaid article that [we] should improve deposit insurance system, establish risk identification and early warning mechanism and release risks in controllable way and speed, to comprehensively enhance ability to prevent fiscal and financial risks and respond to crises; [we] should improve anti-money laundering, antiterrorism financing supervisory measures, establish financial punishment and restrictive system, to effectively cope with financial attacks or sanctions against us in extreme cases;[we] should prevent systematic risks through effectively utilizing and developing financial risk management tools and lowering leverage ratio.

Besides stressing the domestic system reform, China also faces challenges of international finance. Stephen S. Roach, senior researcher of Jackson Institute of Global Affairs of Yale University, recently stated in the public that RMB’s inclusion into the SDR does not mean that China can maintain competitive advantage; improving the competitiveness is an important task for China, and financial reform is a part of that task.

It is widely believed in the industry that China’s financial reform will accelerate in various aspects after RMB is included into the SDR: in terms of exchange rate formation mechanism, the central bank is likely to reduce its interventions to enlarge amplitude of the exchange rate, guide the RMB exchange rate to step towards balanced and constant level; in terms of capital account openness, next step is to further expand the scale and strength for two-way openness in the aspects of direct investment, securities investment, foreign debt and exchange market management and etc.

According to the reports of some domestic brokerages, various measures will be taken timely based on market response and macro-economic trend, such as bringing in qualified overseas investors into foreign exchange market, easing restrictions on transaction, and further opening capital account, after the central bank improves the price-offering mechanism for the middle rate of RMB/USD. At the last stage of interest rate market-orientation, financial reform in next step will focus on formulating flexible management & control measures to make the interest rate truly reflect the supply and demand of the market.

Put the construction of stock market with complete functions on schedule

It is worthy to notice that, in the wide financial reform, Chinese President Xi especially proposed four requirements for stock market mechanism: complete financing functions, solid basic systems, effective market supervision and full protection on right and interest of investors. To this respect, various reports of brokerages believed that next year is significant for the reforms in the capital market.

The journalist finds that Chinese President Xi mentioned China’s capital market at least five times during the two months before the 11th meeting of finance and economics leading team under the central government. Xi also talked about that the government’s responsibility is to safeguard the market order of openness and fairness, no matter in speeches when visiting foreign countries, or in declarations on foreign media, meanwhile, he also stressed that developing the capital market is the reform direction of China, which will not be changed by the fluctuation of stock market.

Based on some comments, it is a practice to respect the objective law of stock market to put the “complete financing function” at the first among the four requirements. In the future five years, development of the stock market will play an important role in supporting the economic growth of a high and medium speed, upgrading of industrial structure as well as implementation of innovative and driving strategies, which is also an important platform to manage the wealth for citizens and effectively operate the social capital.

Chinese Premier Li Keqiang yesterday hosted the executive meeting of the State Council, which has approved Decision on Authorization for State Council to Adjust Suitable Regulations of Securities Law of the People’s Republic of China in Implementation of Stock Issuance Registration System Reform (Draft). It proposes that it has decided to authorize the State Council to carry out issuance registration system on stocks to be publicly issued in Shanghai and Shenzhen stock exchanges within two years since the implementation of the Decision.

The journalist also finds that system constructions are expected to be accelerated, such as orderly promoting market reform and openness, insisting on market-oriented and legalization direction, reinforcing management on accounts and information systems of various types, expanding integration and share of big data, building sound risk pre-warning systems and cross-market real time monitoring systems. In addition, strength will be intensified to investigate and penalize the illegal behaviors, including illegal off-market margin financing, rat trading, insider trading, and etc., to actually protect rights and interests of the investors which has mentioned for many times by the senior management.