Chinese President Xi Jinping said the central bank will play a stronger role in defending against risks, calling for more work on safeguarding the financial system and modernizing its regulatory framework.
China will set up a Financial Stability Development Committee under the State Council, Xi said at a twice-a-decade National Financial Work Conference held July 14-15, state media reported without defining the relationship with the People’s Bank of China. Financial security is part of national security, and finance should better serve the real economy, Xi said.
In a speech, Xi said prudent monetary policy, a goal announced in December, should be firmly implemented and the PBOC should take a stronger macro-prudential policy role. He also called for greater yuan exchange-rate reform, an improved foreign-exchange market system, and steady progress in yuan internationalization, according to state media reports.
Xi is ramping up efforts to ensure stability ahead of a twice-a-decade leadership transition this fall at the 19th Communist Party Congress. He has elevated curbing risk in the $40 trillion financial industry to a new level with ‘strategic importance’ amid increasingly intertwined business between China’s banks, brokerages, asset managers and insurers.
Establishing the committee is noteworthy, though the meeting didn’t produce much surprise, according to Ming Ming, a former PBOC monetary policy official who’s now head of fixed-income research at Citic Securities Co. in Beijing. The name signifies that the panel should be a ministry-level entity directly under the State Council that’s mandated to oversee overall financial coordination, he wrote in a report Sunday.
China will proactively prevent and resolve systemic financial risks, and step up efforts to reduce leverage in the economy, the official Xinhua News Agency reported, citing Xi. He also called for greater accountability for regulators, saying it’s a “dereliction of duty” if they fail to spot and dispose of risks in a timely manner, and stressed that coordination of financial regulation should be improved, and weak links in supervision strengthened.
“The heavy emphasis on risk prevention will put a damper on much-needed reform in the financial market,” such as developing derivatives markets, said Victor Shih, a professor at the University of California in San Diego who studies China’s politics and finance. “With the wording on holding regulators for any signs of instability, they will definitely err on the side of caution. But if regulations are too stifling, financial
talent may leave the country.”
Premier Li Keqiang also spoke at the meeting, calling for moderate credit growth and keeping liquidity ‘basically stable,’ according to state television. He backed ‘professional, consolidated, penetrating’ regulation of all financial businesses to reduce risks.
More-centralized regulatory powers are welcome, though the plan suggests China wants financial markets to be purely mechanisms for national development, not speculation, according to Michael Every, senior Asia-Pacific strategist at Rabobank in Hong Kong.
“It’s worrying that yet another area of the economy is now considered national security,” Every said. “That sends a strong message we can never have another crash, and that means we can’t have volatility, and that means no real markets, or perhaps no true role for foreign players as price setters.”
The People’s Bank of China last year began measuring risk using what it calls a Macro Prudential Assessment system built on examining banks’ capital-adequacy ratios — a monitoring authority once on the China Banking Regulatory Commission’s turf. Still, information on financial firms including brokers and insurers is supervised by others such as the China Securities Regulatory Commission and China Insurance Regulatory Commission.
The financial work conference has held a special place in China’s economic and political calendar since it was introduced to encourage more sustainable economic growth after the Asian financial crisis. The first, in 1997, saw the establishment of an insurance regulator and a plan to bail out the largest banks.
The second gathering led to the creation of a banking regulator and a drive to list major state-owned lenders on overseas stock exchanges. In 2007, the conference oversaw the creation of the sovereign wealth fund, China Investment Corp., which now has $813.5 billion of assets. The meeting in 2012 focused on the fallout from the global financial crisis.
China’s economy is holding up. Economists estimate growth edged down in the second quarter with a 6.8 percent expansion, decelerating from 6.9 percent in the first three months of this year, according to a Bloomberg survey before the data due for release Monday.
A 12-minute segment on CCTV’s main national newscast showed Xi leading the gathering, flanked on the dias by Li, Vice Premier Zhang Gaoli, Politburo Standing Committee member Yu Zhengsheng, who leads the Chinese People’s Political Consultative Conference, and Wang Qishan, a key adviser to the president who ranks sixth in the Communist Party hierarchy.
The announcements reflect increasing financial system vulnerability and the government’s growing desire to prevent a destabilizing shock, according to Rajiv Biswas, chief Asia-Pacific economist at IHS Markit in Singapore. “Key priorities for the PBOC and the new commission will be to stabilize the non-performing loans in the Chinese banking system, manage shadow banking risks and manage risks related to the escalating level of corporate debt,” he said.