On August 2, the People's Bank of China (PBC) held a video conference to describe the current economic and financial environment and to describe tasks slated for the second half of the year. Deputy Governor Chen Yulu presided over the meeting.
In the meeting, five areas of importance were addressed, including expanding the capacity to: cater to the real economy; prevent financial risks; increase internationalization; expand innovation; and improve financial institution governance. While much of the 1H2019 and 2H2019 policies are not so new, making the following a somewhat boilerplate read, there are some interesting developments that have arisen (emphasized in conclusion).
1H 2019 Report
The report on the first half of the year stated that, despite a worsening domestic economy and international economic issues the central bank has strived to prevent financial risks and deepen financial reforms. Monetary policy remained moderate, with countercyclical regulation. Financing to private small and micro enterprises has expanded in order to maintain the firms that employ many Chinese families. Financial risks were controlled, as liquidity risks in small and medium sized financial institutions were reduced, property and financial market risks were dampened, and risks of financial holding groups were constrained.
Financial reform progressed: interest rates moved further toward marketization, macroprudential supervision was improved, and central and local financial supervision was enhanced. Local risk control made progress. Financial opening up moved forward, with greater market access granted to banking, securities, and insurance firms. Credit rating, bank card clearing, and non-bank payment access was liberalized.
Banking, securities and insurance industries have significantly liberalized market access, opening up foreign-invested corporate credit ratings, credit ratings, and bank card clearing and non-bank payment access. Financial services management improved. A statistical system for asset management products was created, while the license approval process for corporate bank accounts was eliminated.
Challenges and slated work in 2H 2019
The conference underscored the fact that China's economy faces numerous pressures in the second half of the year. For the second half of 2019, continuing the process of financial supply side reform will remain a major focus. Structural reform will be aimed at improving financial corporate governance, deepening capital markets, and expanding inclusive finance. Improving corporate governance has been the focus of policy for the past two years. Deepening capital markets is a somewhat newer focus, aiming to increase the level of direct financing throughout the economy. Inclusive finance has been an important project for several years. By the end of May 2019, the balance of small and micro loans had increased by 21% year-on-year.
Risk disposal of financial institutions is to continue through mergers. China’s risk supervision system is to be further developed in order to improve mechanisms for market exit and risk disposal. Supervision and regulation should be tightened for microfinance companies, commercial factoring companies, financing guarantee companies, financial leasing companies, local asset management companies, and pawn shops.
Specialized financial institutions will be encouraged in order to diversify the financial industry to increase access to finance. Small loan companies should be encouraged to cater to small firms and leasing companies should be encouraged to carry out direct leasing.
China’s monetary policy is to remain prudent and somewhat tight. The broad money supply and social financing growth rates are to match nominal GDP growth. This will help to ensure sufficient liquidity in the financial system to cater to the real economy. Loan costs are to continue to be kept down for small and micro enterprises.
Small financial institutions will continue to be made to comply with regulations in order to reduce financial risks. Housing speculation should be reduced, and large scale housing enterprises with high leverage must be strongly supervised in order to control their interest-bearing liabilities. Potential channels for systemic risk and contagion should be blocked.
Since 2018, local governments have set up local financial supervision bureaus. These bureaus will supervise the six types of financial institutions as well as local exchanges. Local and central level financial supervision systems are to become better integrated in the second half of this year in order to boost risk disposal, consumer protection, and information sharing.
Finally, China will continue to develop financial technology. The central bank plans to accelerate the research and development of China’s sovereign digital currency. The PBC expressed its interest in Facebook’s digital currency, Libra. The currency is considered to be a super-sovereign currency, since it is anchored by a basket of legal currency. Wang Xin, Director of the Central Research Bureau, stated that China must increase its international cooperation in the area of digital finance.
Financial professionals who have an interest in the Chinese economy should note that the Chinese regulators are increasingly telegraphing their moves. Some of these are policies we hear about on a regular basis. Others are more interesting.
These include local government financial supervision, accelerated development of a sovereign digital currency, and issues related to the overleveraged status of large scale housing enterprises. Anyone invested in China should keep a close watch on these policies. #PolicyPredict
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