Good morning! It is a pleasure to attend the Annual Meeting of the Caijing Magazine.
This year is the first year in the endeavor to implement the decisions and spirits adopted at the third plenum of 18th CPC Central Committee and to comprehensively deepen reform and opening-up. The financial sector reform has been furthered steadily and made substantive progress in this year. Let me share with you a brief overview of what has been achieved in financial sector reform this year.
1. New Steps in Market-based Interest Rate Reform
Interest rates are the prices of capital and the market-based interest rate reform has a bearing on the overall progress of reform. Since the beginning of this year, the PBC has taken major steps in the market-based reform of deposit interest rates. On 21 November, while cutting the benchmark interest rates of loans and deposits, an important measure was taken to promote market-based interest rates, i.e. the floating range of deposit rates was expanded from 1.1 times to 1.2 times the benchmark rates. Moreover, the maturity brackets of deposit and lending interest rates were simplified to provide more space for market pricing of interest rates, and to improve the Shanghai inter-bank lending rate and market interest rate self-regulatory pricing mechanism. The inter-bank CD business has expanded. January through October 2014, more than 580 billion of inter-bank CDs were issued, as compared with 34 billion in the whole year of 2013. This is of great significance in improving market interest rate mechanism and building independent pricing capability of the financial institutions. With the innovation of financial products, the interest rates have become more and more market based.
In addition to interest rates, the RMB exchange rate regime reform has been furthered. On March 17, 2014, after carefully considering the adaptability of the economic entities, the PBC expanded the floating range of the trading price of RMB against the US dollar on the spot inter-bank market from 1 percent to 2 percent, and the floating range of the dollar price quotation at bank counters from 2 percent to 3 percent. More importantly, the PBC has massively reduced intervention on the foreign exchange market and basically exited from regular intervention since the beginning of Q2. Overall speaking, the foreign exchange market has been stable, with the RMB exchange rate moving in both directions with greater flexibility and exchange rate expectations diverging among the market participants. Moreover, the China Foreign Exchange Trade System was authorized to launch RMB’s direct trading with the Pound sterling, euro, Singapore dollar, and New Zealand dollar as a measure to reduce the currency conversion cost for economic entities and improve market efficiency.
2. Rapid Growth of Direct Financing
In 2014, the PBC continued the market-oriented reform by reducing the items subject to administrative approval, strengthening market discipline, encouraging innovation in financial market and institutional arrangements, and expanding the inter-bank bond market to beef up the share of direct financing. From January to October 2014, a total of 2.1 trillion yuan was raised on the enterprise bond market, up 31 percent year on year. Asset securitization has also grown in volume. As of end October 2014, financial institutions raised a total of 303 billion yuan by issuing 77 credit asset-backed securities, 3 times the volume raised in the corresponding period last year. Comprehensive measures were adopted to restore and strengthen the financing function of the equity market. The share of direct financing in all-system financing aggregate rose to 18 percent in the first ten months of 2014, up more than 5 percentage points year on year.
3. Further Opening-up of the Financial Market
The bond market has been furthered opened up. Measures have been adopted to facilitate domestic institutions to issue RMB bonds in Hong Kong and overseas enterprises to issue RMB bonds on the on-shore market. As of October 2014, 16 domestic financial institutions raised 105 billion yuan from the offshore RMB bond markets, and overseas enterprises raised 500 million yuan from the onshore market.
The opening-up of capital market has been promoted in both directions. The Shanghai-Hong Kong Stock Market Connect mechanism has been launched. The RMB qualified domestic institutional investors (RQDII) are allowed to invest in overseas securities market with their RMB funds, and the pilot program of RQFII has been expanded to have more investors on the domestic securities market. Multinational firms are allowed to conduct centralized cross-border RMB fund operation. In particular, the smooth launch of the Shanghai-Hong Kong Stock Market Connect mechanism will help facilitate the integration of the domestic and global capital market, promote the innovation and development of the capital market in the Mainland and in Hong Kong, and contribute to the capital account convertibility and the internationalization of RMB.
Moreover, the PBC has facilitated the experiments at the China (Shanghai) Free Trade Zone in order to accumulate replicable experience in reform, opening and risk regulation in the five aspects, i.e. free trade account system, exchange facility for investment and financing, the cross-border use of RMB, the market pricing of interest rates, the reform of foreign exchange administration.
4. Faster Pace of RMB “Going Global”
In the first ten months of 2014, the volume of RMB settlements of cross-border transactions approached 8 trillion yuan, accounting for approximately 24 percent in the total cross-border payment and receipt volume. The share of RMB settlements in the total volume of settlement of trade in goods was 15.7 percent. RMB receipts and payments have taken place between China and 174 countries. In the meantime, international cooperation on the use of local currency has deepened. So far, the PBC has signed local currency swap agreements with 28 foreign central banks and the total volume of swap facilities exceeds 3 trillion yuan. Specifically, in 2014 the PBC signed local currency swap agreements with central banks of the Switzerland, Sri Lanka, Russia, Qatar, and Canada. As of end of October, RMB clearing arrangements have been established between the PBC and the foreign central banks of twelve countries or regions, including eight such arrangements signed in 2014 with central banks of UK, Germany, France, Republic of Korea, Canada, Australia, Luxemburg, and Qatar. Thus, in addition to countries and economies in Asia, RMB cooperation has been expanded to major economic and financial centers in Europe, Americas, Oceania, and the Middle East. As of end October, 169 overseas institutions obtained access to the China’s inter-bank market to make investment, and more than 30 overseas central banks or monetary authorities have held RMB in their foreign exchange reserves.
The RMB internalization is both the outcome and the catalyst for China’s reform and opening-up. It involves reforms such as streamlining administration and delegating powers, market-based interest rate reform and exchange rate regime reform, the opening up of financial markets, RMB convertibility under the capital account, macroeconomic management, financial regulation, and has far-reaching implication for future reform and development.
5. Innovations in Macroeconomic Management
To maintain the liquidity in the banking system at appropriate volumes and support the reasonable growth of money and credit, in 2014 the PBC has, in response to the maturities, entities and intended use of liquidity demand, continued to enrich and improve the combination of monetary policy tools on the premise of promoting structural adjustment. First, targeted reduction in the deposit reserve requirement ratio (RRR) was carried out on two occasions. The RRR of rural commercial banks and rural cooperative banks at the county-level was cut by 2 and 0.5 percentage points respectively, and that of commercial banks that have complied with prudential requirements and have reached the required ratios in their lending to agricultural sector, rural areas, and farmers (agro loans), and lending to small and micro enterprises. Second, innovation was made in the tools of money supply to adjust supply of liquidity and guide the movement of market interest rates. The medium-term lending facility (MLF) was launched to provide medium-term base money to commercial banks and policy banks that have complied with macro-prudential requirements to influence the balance sheets of financial institutions and the market expectations, to guide the financial sector to provide cost-effective funding for the real economy based on the guidance of state policies, and to help lower the cost of financing of the real economy. Overall, this instrument of targeted supply of liquidity helps strike a balance between adjustment of money aggregates and structural adjustment, and guide the financial sector to support development of the real economy.
6. Lowering the Financing Cost of Real Economy by Deepening Reform
Since the beginning of this year, with the impacts of global financial crisis lingering and downward pressure in domestic growth building up, some enterprises have underperformed, and small and micro enterprises have reported difficulty in accessing and the high cost of financing. To address this problem, the State Council convened executive meetings on two occasions, to tackle the root causes and the symptom of the problem, and to promote structural reform and adjustment. On the one hand, the State Council required financial institutions to optimize the credit structure, clean up and rectify unreasonable financial service charges, regulate the shadow banking business, and curb the excessive rising of financing cost. On the other hand, the State Council required to deepen the financial system reform, including advancing the market-based interest rate reform and exchange rate regime reform, developing a multi-tier capital market, and accelerating the development of small and medium financial institutions such as banks established with private capital. With the advancement of these reforms, the problem of high financing cost for the real economy will be eased significantly.
In the next stage, the PBC will follow the strategic arrangements of the 18th National Congress of the CPC, the 2nd, 3rd, and 4th Plenums of the 18th Central Committee of the CPC, continue to deepen financial reform and opening-up, accelerate the market-based interest rate reform and exchange rate regime reform, promote faster RMB convertibility under the capital account, develop and implement the reform program of policy financial institutions, and establish a deposit insurance scheme. In the meantime, effort will be made to prevent potential financial risks and promote the sustainable and healthy development of the national economy.
Thank you.
