Future Tasks

By+Dong+Ximiao

aGainST the backdrop of a slowing global growth and a rebalancing Chinese economy， China mapped out policies to improve its gigantic financial system at the two-day Fifth National Financial Work Conference convened on July 14-15 in Beijing.

Since 1997， the meaningful meeting has been held every five years， setting tones for financial reforms in the next few years. This year， the meeting highlighted tasks of improving the financial sector to better serve the real economy， preventing financial risks and deepening reforms of the financial sector. The conference prioritized proactive measures to unwind systematic financial risks， decided to set up a committee under the State Council to oversee financial stability and development and further open up the countrys financial markets.

Serving the real economy

The Fourth National Financial Work Conference held five years ago clearly identified the need to direct investment to the real economy. This years conference reiterated the importance and necessity of making the financial sector better serve the real economy.

Financial history over the past 50 years has proven that consequences of a financial turmoil were catastrophic to any economy and would further affect the world economic order. Fundamentally， turbulences are attributed to inherent defects of financial systems caused by the long-time separation of financial sectors from real economies.

Therefore， directing investment to the real economy is an essential measure to guard against systematic financial risks. With the tone set for future reforms， financial service providers， especially banks， should raise financial supplies to businesses engaging in the real economy and provide additional support to small and medium-sized enterprises. This would facilitate businesses to raise capital from the stock and bond market. The leverage of state-owned enterprises should also be reduced.

A mechanism for seamlessly connecting the financial sector to businesses of the real economy should be established. Based on market-oriented principles， financing should play a greater role in optimizing resources and advancing the supply-side structural reform.

Preventing systematic risks

Since the First National Financial Work Conference was held in 1997， Chinas financial regulatory and supervising mechanism has greatly improved. The Peoples Bank of China， the nations central bank， China Banking Regulatory Commission， China Securities Regulatory Commission and China Insurance Regulatory Commission have been working side by side and playing their respective due role in regulating the financial market and guarding against risks in the sector. However， as financial institutions expand their business to an unprecedented level of complexity， chances are that trans-sector financial turmoil will break out. The current regulatory mechanism faces problems of inefficiency and high-cost communication. It may not be able to timely respond to complex emergencies.

Therefore， while maintaining the current mechanism， the meeting decided to set up a committee under the State Council to oversee financial stability and development to better respond to new scenarios. Meanwhile， the central bank will play a greater role in regulating financial markets as its functions of overall supervision and risks prevention were strengthened， in line with the prevailing practice of highlighting central banks overseeing role in the United States and European nations.

Going forward， the premier of China will act as the head of a newly-established committee coordinating the three existing regulatory bodies. The committees duties and rules of procedures will also be clarified to ensure its efficiency and accountability. Such a reformed and higher-level regulatory committee is expected to deal with issues relating with excess liquidity， defaults and malpractices， and guard against systematic risks that would threaten the entire economy and social stability.

Opening the financial market

As the Belt and Road Initiative advances， financial institutions should better serve Chinese businesses going abroad. Chinese President Xi Jinping said at the conference that developing direct financing will be prioritized， while the indirect financing structure will be optimized. As for direct financing， the establishment and improvement of the stock exchange market， Growth Enterprises Market board， National Equities Exchange and Quotations， regional equity market and equity crowdfunding market should be pushed forward. Efforts should be scaled up to develop a multi-level capital market. More efforts should be made to help qualified businesses to finance themselves on capital markets and expand their proportion and channels of direct financing. Meanwhile， investors legitimate rights and interests should also be safeguarded.

As for indirect financing， the real economy and financial consumers would be better served by accelerating the strategic transformation of major state-owned banks and developing small and medium-sized banks and private financial institutions.

Xi also said that China will further open up its financial market to promote the steady internationalization of the RMB and capital account convertibility. To this end， more Chinese firms should be supported and encouraged to expand business in overseas markets as China is expanding the scale of preferential loans and credit financing offered to developing nations. The government should also improve the connectivity of capital markets among participating nations of the Belt and Road Initiative and encourage the Chinese capital market to cooperate with foreign counterparts.

While encouraging Chinese financial institutions to set up overseas branches， China should also facilitate activities of foreign financial businesses in China. Mechanisms of Qualified Foreign Institutional Investors （QFII） and RMB QFII should be improved to relax restrictions on market access for foreign investors and expand Chinese investment in overseas markets. Qualified Chinese firms should also be encouraged to list abroad.