The 19th National Congress of the Communist Party of China proposed that in order to successfully build a moderately prosperous society in all respects, we must win the three major battles, one of which is to prevent and resolve major risks. The sudden COVID-19 has seriously affected the normal operation of the domestic and international economy, adding many new financial risks and challenges. However, we have no way out. We must calmly respond, face difficulties, and strive to achieve a long-term balance between stable growth and risk prevention, providing solid financial support for the comprehensive construction of a moderately prosperous society.
1、 Maintaining financial security is crucial for China’s overall economic and social development
Financial revitalization and economic stability; Financial security is an important component of national security, and maintaining financial security is a strategic and fundamental matter that affects the overall development of China’s economy and society. The responsibility for doing a good job in financial work is significant, and there is no room for any negligence or negligence.
Finance and risk always go hand in hand. According to the principles of Marxist political economy, financial risk originates from the inherent contradiction of commodities, namely the unity of opposites between value and usage value. After the emergence of currency, the internal contradiction of goods externalizes into the external contradiction between goods and currency. The commodity economy consists of the real economy and the monetary economy, which are interdependent and mutually reinforcing; At the same time, they may also deviate from and conflict with each other. When the production structure is imbalanced or credit deviation is excessive, it will lead to the accumulation of financial risks. After the formation of the country, the government intervened in economic activities from multiple perspectives. In particular, the transformation of currency from a folk equivalent to a government fiat currency not only facilitates production and exchange, but also brings new and huge risks due to government misconduct.
Looking at the world, the rise and decline of some countries are often closely related to their financial capabilities. In the 17th century, the Netherlands was able to achieve maritime hegemony, and its modern financial system played a very important role. Later, the financial revolution arose in Britain, promoted the industrial revolution, and helped it become the so-called “the empire on which the sun never sets”. Similarly, there are countless examples of financial risk diffusion leading to economic crises and national unrest. In the 16th century, Spain expanded abroad extensively and accumulated huge debts, ultimately leading to a financial crisis and a sudden decline in prosperity. The Dutch tulip incident in 1637 and the British South China Sea foam incident in 1720 both severely damaged the country’s economy and national strength.
The Great Depression of the 1930s has left people with lingering fear. In 1929, the US stock market plummeted, and in 1930, a wave of bank runs and bankruptcies occurred, spreading into an economic crisis that swept the world, with multiple governments changing. After World War II, Western countries experienced multiple severe financial crises. stay.Under the international financial system led by the United States and Europe, developing countries often face unfavorable situations such as hot money inflows and high external debt, leading to multiple economic recessions. The lessons from the Latin American debt crisis and the Asian financial crisis of the last century are very profound. Since the beginning of this century, in order to get rid of economic and social difficulties, the United States and Europe have continued to expand fiscal expenditure, relax the money supply, accumulated huge debt and asset foam, and finally led to the subprime crisis and European debt crisis. The negative effects of the subsequent quantitative easing policies have not yet been fully released.
Since the reform and opening up, China’s financial industry has achieved a historic leap and established a modern financial system with its own characteristics. We rely on the leadership of the Party and the advantages of the socialist system, with a self revolutionary spirit, actively eliminate hidden dangers, and successfully overcome severe inflation in the late 1980s, economic overheating in the mid-1990s, multiple external risks and other shocks. This not only provides a relatively stable financial environment for China’s economic and social development, but also contributes to global financial stability and development.
After the outbreak of the international financial crisis in 2008, the international economic and financial situation has become more complex and volatile. China’s business cycle, structural and institutional problems have met, and the financial risk situation is complex and severe. With the gradual improvement of the balance of payments, the leverage ratio ratio of domestic enterprises, governments, and residential sectors has risen rapidly, the financial products and market structure have become increasingly complex and less transparent, the self circulation of funds within the financial system, the tendency of disequilibrium to emptiness has become increasingly fierce, some illegal financial groups and illegal financial activities have grown savagely, and corruption and violations of discipline within the financial system continue to spread. If left unchecked, it will inevitably lead to systemic risks, have disruptive effects, and seriously endanger sustained economic development and national political security.
At the end of 2016, the Central Economic Work Conference explicitly requested that “prevention and control of financial risks be given a more important position”.
2、 Substantial breakthroughs have been made in the battle to prevent and resolve financial risks
According to the decisions and deployments of the Central Committee of the Communist Party of China, under the leadership of the State Council and the Financial Stability and Development Commission of the State Council, various regions and departments, as well as the financial system, have worked together to advance the battle against and resolve financial risks, achieving significant results..The blind expansion of assets has been fundamentally reversed. From 2017 to 2019, the average annual growth rate of credit funds and bond investment provided by the banking industry to the real economy reached 12%, respectively.1% and 13%.9%。 And the average annual growth rate of assets is only 7%.7%, less than half of the amount from 2008 to 2016, is equivalent to investing an additional 64 trillion yuan in the real economy, while the banking industry’s assets have expanded by 88 trillion yuan. The aggressive investment and wealth management business in the insurance industry has been curbed, and the proportion of short-term premiums in life insurance has decreased from a historical high of 31% to 4%. The leverage ratio of the enterprise sector has declined steadily, and the growth of the leverage ratio of residents and government departments has slowed down. The macro leverage ratio ratio has reversed the trend of an average annual increase of more than 10 percentage points from 2008 to 2016, and has generally stabilized at about 250% in the last three years.
Shadow banking risks continue to converge. The risks and hidden dangers of shadow banking in China were once very serious. Shadow banks are nested layer by layer, with hidden risks, closely intertwined with the real estate foam, local implicit debt, illegal Internet financing, etc. Starting from 2017, we began to focus on rectifying non-standard interbank, wealth management, and off balance sheet businesses. In 2018, the new asset management regulations were implemented, and after several years of efforts, a fundamental improvement momentum was initially shown. At the end of 2019, the size of shadow banking decreased by 16 trillion yuan compared to its historical peak. The interbank financial management, interbank investment, and securities firm asset management have decreased by 87%, 26%, and 42% respectively compared to the peak. Entrusted loans, trust loans, and various cross financial investment products continue to shrink. Some international organizations and professional institutions give high praise, believing that China’s achievements in reducing shadow banking risks are the most significant, fundamentally maintaining the stability of the financial system.
Significant progress has been made in the identification and disposal of non-performing assets. In response to the common issue of inaccurate asset quality, financial institutions have been inspected and evaluated from multiple perspectives, and strict requirements have been placed on the prudent grading of risky assets. We will resolutely punish the concealment of non-performing assets and crack down on fraudulent accounting. The ratio of loans overdue by commercial banks for more than 90 days to non-performing loans exceeded 128% in 2016 and decreased to 82% at the end of 2019. In the past three years, the banking industry has disposed of a total of 5 non-performing loans.8 trillion yuan, exceeding the total disposal amount of the previous 8 years. At the same time, accelerating the replenishment of capital and increasing provisions has comprehensively enhanced the strength of various financial institutions to cope with external shocks.
Illegal and corrupt behavior is severely punished. Resolutely crack down on illegal financial groups and activities, and orderly promote asset liquidation, recovery of stolen goods and losses, and risk isolation. Protect legitimate income, ban illegal income, and handle shareholders who maliciously manipulate financial institutions in accordance with the law. Taking over Baoshang Bank in accordance with the law, while fully protecting the interests of depositors, breaking rigid cashing, promoting credit stratification, and enforcing market discipline. Dispose of serious illegal and irregular enterprises such as Anbang Group and Huaxin Group in accordance with the law, and promptly restructure, reorganize, and liquidate several holding companies suspected of handling financial business in violation of regulations. Promote the “one enterprise, one policy” reform, restructuring, and risk management of high-risk small and medium-sized banks and trust companies. A group of corrupt individuals who collude with officials and businesses, transfer profits, and illegally occupy have been brought to justice, including some financial management department staff who are “self monitoring”.
The risk of internet finance has significantly decreased. At one time, China had a large number of “unlicensed driving” platforms illegally engaged in financial activities, many of which confused the public under the banner of Financial innovation and “Internet plus”. After centralized rectification, the risk situation in the internet finance field has significantly improved, and the chaos of the past “blooming everywhere” has been rectified. A large number of illegal internet wealth management, insurance, securities, funds, and token institutions have been banned. The actual operation of P2P online lending institutions nationwide has dropped from about 5000 during the peak period to 29 by the end of June 2020, with the lending scale and number of participants decreasing for 24 consecutive months..4 trillion yuan, helping a large number of enterprises with potential for development to overcome difficulties. A large number of illiquid enterprises have mitigated their bond default and stock pledge risks, and a considerable number of backward production capacity or poorly managed “zombie enterprises” have been orderly liquidated. About 500 large and medium-sized enterprises have implemented joint credit pilot projects, significantly enhancing the endogenous driving force of debt constraints. Entering the real estate market. Compared with 2016, the growth rate of real estate loans in 2019 decreased by 12 percentage points, and the proportion of new real estate loans to all new loans decreased by 10 percentage points. It not only meets the normal needs of stable development in the real estate industry, but also avoids greater risks due to excessive concentration of funds.
Preliminary control of implicit debt risks for local governments. Implicit debt is a potential trigger point for financial risks. In recent years, China has strictly controlled the increase in local government financing and strictly prohibited illegal financing. At the same time, we will implement simultaneous efforts to unblock and orderly resolve existing implicit debts, and the financial system will actively cooperate with local governments in debt replacement. Promote the sale of local bonds to individual investors at commercial bank counters, and provide various financial support for legally added local government debts. In the past three years, banking and insurance institutions have cumulatively increased their holdings of local government bonds by 11 trillion yuan..400 million yuan, more than the total of the past decade. By striving to address institutional shortcomings, regulatory work has been further integrated into the track of rule of law. Since 2017, a total of 209 banking and insurance regulatory regulations and normative documents have been issued and implemented. The development philosophy and business model of financial institutions that prioritize speed over quality have been largely corrected.
The quality and efficiency of serving the real economy have significantly improved. From 2017 to 2019, RMB loans increased by 46 trillion yuan. Among them, infrastructure, affordable housing projects, and manufacturing loans increased by 8 trillion yuan and 3% respectively.3 trillion yuan and 1.6 trillion yuan. The average annual growth rate of scientific research technology, information software, and ecological and environmental protection loans reached 31% respectively.2%、20.8% and 19%.5%, significantly higher than the average loan growth rate during the same period. The overall financing of small and micro enterprises has achieved “volume increase, area expansion, and price decrease”, and the average annual growth rate of inclusive small and micro enterprise loans is 23%.2%。 The coverage rate of basic financial services in impoverished areas is close to 99%. In 2019, major illness insurance covered over 1.1 billion urban and rural residents, with agricultural insurance risk coverage exceeding 3%.8 trillion yuan. Insurance compensation has become an important source of funding for recovery and reconstruction after various natural disasters. The decision and deployment regarding the battle to prevent and resolve financial risks are completely correct and timely. If the aircraft were delayed and rectification was delayed, the current difficulties would be much greater, and the adverse consequences would be incalculable.
3、 New major challenges emerged in the financial sector after the COVID-19
China’s economy is in a critical period of shifting towards high-quality development, already facing many difficulties such as accelerated aging, declining savings rates, and enhanced resource and environmental constraints. The once-in-a-century pandemic directly caused a deep decline in growth in the first quarter. Despite the resumption of positive growth in the second quarter, development in the near to medium term still faces many uncertain factors. The Global Economic Outlook released by the World Bank in June predicts that the global economy will contract by 5% in 2020.2%。 In the coming period, both supply and demand sides of China’s economy, as well as domestic and foreign markets, will be under pressure, and the financial system will inevitably encounter great difficulties.
To curb recession, when economic activity sharply contracts, financial activity must instead expand. The original regulation goal was that the growth rate of broad money and social financing scale was slightly higher than the nominal GDP growth rate, which was more than 10 percentage points higher in the first half of this year. It is expected that the overall leverage ratio ratio and sub sector leverage ratio ratio will rebound significantly this year, and the bad debt of financial institutions may increase significantly. New Formation of the Banking Industry in 2019 2.After the outbreak of the “black swan” pandemic in the 7 trillion yuan non-performing loan market, it is inevitable that the asset quality will double and deteriorate. Due to the time lag in the financial response, the current asset classification has not accurately reflected the true risk, and the bank’s spot book profit has a significant inflated component. This situation will not persist, and non-performing assets will gradually be exposed.
Against the backdrop of years of rapid economic globalization, the interdependence between countries’ economies and finance has reached a high level. Unfortunately, the current atmosphere of international cooperation is not ideal. In recent years, the economic structure of a few developed countries has continued to deteriorate, leading to social class division and opposition. Extremism and populism are increasingly expanding, trade protectionism is prevalent, and “retreat”, “decoupling”, and “disconnection” are increasing. They have openly adopted suppression and containment strategies against China. After the outbreak of the epidemic, some countries have failed to respond effectively themselves, but have transferred conflicts to the outside world in various ways. The United States has included enterprises and institutions from China and other countries in the “physical list”, causing frequent incidents. These practices endanger normal economic and trade cooperation, add more variables to the global economic recovery, and disrupt financial stability and security.
It is necessary to adopt a series of macro hedging policies in response to the epidemic, and further efforts may be made in case of new abnormal situations during implementation. But it cannot be ignored that in the context of loose capital, enterprises, residents, and governments may all increase their debts. After the expectation of interest rate downward consistency is strengthened, it is likely to encourage leverage trading and speculation, and promote a new round of asset foam. Real estate prices in some places are beginning to rebound, and financial resources may once again be concentrated in high-risk areas. Borrowers with poor credit may maliciously evade debts through preferential policies such as delayed repayment, and high-risk shadow banks with complex structures are also prone to making a comeback.
Currently, many countries, especially the most developed countries, have adopted strong stimulus measures internationally. Some countries implement unlimited quantitative easing policies, with both fiscal and monetary policies, releasing a large amount of liquidity to the market and providing direct financing or guarantees to individuals and enterprises. In the short term, this approach is beneficial for stabilizing the economy and finance, but there is significant uncertainty in the medium to long term effects. There is no free lunch in the world, and there is no banquet that never ends. In the international monetary system dominated by the US dollar, the unprecedented unlimited quantitative easing policy of the United States is actually consuming the credit of the US dollar, eroding the foundation of global financial stability, and will have unimaginable negative effects. Emerging economies may face multiple pressures such as imported inflation, foreign currency asset shrinkage, exchange rate and capital market volatility. More seriously, the world may once again be on the brink of a global financial crisis.
In addition, the rapid development of financial technology in recent years has brought us both many opportunities and great challenges. China’s financial technology ranks among the top in some fields in the world, but there is no ready system for risk prevention and control.Experience can be learned from. Due to the widespread application of high-tech technologies such as big data, cloud computing, and artificial intelligence, the manifestations and transmission pathways of traditional financial risks have undergone profound changes, and non-traditional risks such as data security have become increasingly prominent. These risks have strong suddenness, concealment, and destructive power, which cannot but arouse our high vigilance.
4、 The financial system should strive to ensure the timely achievement of economic and social development goals
We need to effectively enhance our awareness of opportunities and risks. We need to “stabilize the overall situation, coordinate and coordinate”, further improve the quality and efficiency of financial services, and promote economic development to enter the normal track as soon as possible; We need to implement classified policies and precise bomb disposal, orderly address prominent risks in key areas, and achieve a long-term balance between stable growth and risk prevention. From the current stage, it is particularly important to do the following work well.
Fully promote the restoration of normal circulation of the national economy. Finance and the real economy coexist and prosper together. Serving the real economy is the duty and purpose of finance, and it is also a fundamental measure to prevent financial risks. As the saying goes, “the road to agricultural and industrial transactions is smooth, while the coin of turtle shells, money, knives, and cloth is thriving. The current primary task is to comprehensively restore the industrial cycle, market cycle, and economic and social cycle while strictly preventing and controlling the rebound of the epidemic. We must closely adhere to the tasks of “six stability” and “six guarantees”, fully utilize the favorable conditions of China’s large market potential, abundant savings resources, and wide scope of international cooperation, and give full play to the enthusiasm and initiative of central and local units. We should strengthen the coordination of fiscal, financial, employment and industrial policies, especially serve various market players such as small, medium-sized and micro enterprises, open up all links of production, distribution, circulation and consumption, and promote the formation of a new development pattern with the domestic systemic circulation as the main body and the domestic and international double cycles promoting each other.
Accelerate the structural reform of the financial supply side. Finance is the core and bloodline of modern economy, and an important tool for resource allocation and macroeconomic regulation. Once finance is done well, one can play chess and live the whole game. In the economic supply side structural reform, the financial supply side structural reform plays the role of a “chess eye”. We must adhere to the direction of socialist market economy reform and accelerate the transformation of the development mode of the financial industry. Promote the alignment of financial structure with economic and social development, facilitate financing, reduce real economic costs, and improve resource allocation efficiency. Improve the corporate governance of financial institutions, correct the two negative tendencies of major shareholder manipulation and insider control. Continuously improving the basic system of the capital market, guiding wealth management, trust, insurance, etc. to increase long-term stable funds for the capital market. Accelerate the construction of the second and third pillars of pension insurance, and promote the proportion of pension funds in the capital market to reach the world average level.., ultimately leading to serious consequences. Financial institutions should adopt a more prudent financial accounting system, classify assets effectively, and fully expose non-performing assets. In daily supervision, it is not simply a matter of using an increase in defect rates as a criterion for evaluation. We need to utilize the financial space freed up by the reduction of regulatory provisions and increase the disposal of non-performing assets. Develop realistic revenue and profit plans, increase provision and capital replenishment. Clear the policy blockages of non-performing asset disposal, and create more favorable conditions for improving the robustness of the financial system.
Prevent high-risk shadow banks from rebounding. Shadow banking risks have a “low ignition point” and a “high intensity”, and if there is any disturbance, it may form a “prairie fire” and cause endless harm. At present, after unremitting governance, shadow banks have achieved a certain degree of risk control, but the soil for survival has not been completely eradicated. A slight relaxation of regulation is highly likely to lead to a comprehensive resurgence, leading to the abandonment of previous achievements. To maintain strategic focus and maintain a high-pressure posture towards high-risk businesses. Emphasize the principles of simplicity and transparency, standardize cross financial products, and achieve a clear boundary between public offering products and private offering products. Isolate the risks of on balance sheet and off balance sheet businesses, separate entrusted and self operated businesses, and distinguish between savings and investment products. Strive to achieve clear responsibilities and orderly division of labor in the stock market, bond market, credit market, and money market. At the same time, we will continue to rectify internet financial risks and crack down on illegal fundraising and other illegal financial activities.
Timely handle risks of different types of institutions. Accurately and effectively implement policies for institutions with different risks. For high-risk financial groups, they shall be disposed of in accordance with established plans and division of labor in accordance with laws and regulations. For rural financial institutions, we will adhere to the overall stability of the status of county-level legal persons, and encourage the use of various methods to supplement capital and introduce strategic investors. Support provincial governments in formulating and implementing disposal plans for local legal entities such as urban commercial banks and trusts, and strengthen professional guidance from financial management departments. Quickly study and propose a list of systemically important domestic banks, and organize the development of recovery and resolution plans for financial institutions on the list. We need to establish an efficient mechanism for handling institutional risks. Financial institutions fulfill their main responsibilities, and shareholders, especially major shareholders, bear important responsibilities. To fulfill the territorial responsibility, the local party committee and government should closely combine the leadership responsibility of the local party, the management responsibility of local state-owned financial capital, the risk disposal responsibility of the jurisdiction and the responsibility of maintaining social stability. The financial management department fulfills the responsibility of regulatory entities. Improve the deposit insurance system and institutional system, and fully leverage the role of early intervention, early warning, and early disposal..Ability to timely detect and effectively curb external shocks from spreading domestically. Actively participate in international financial governance and regulatory rulemaking, strengthen international coordination of macroeconomic policies, and enhance international discourse power.
Effectively strengthen education and protection for financial consumers. Strengthen the popularization of financial knowledge, so that both urban and rural residents can understand that investment carries risks. There are no high return and low risk financial products in the world, let alone so-called “stable profit and no loss” financial projects. Promoting “breakeven and high return” is financial fraud. Both institutional and individual investors should establish a sense of value investment, rational investment, and risk prevention. Promote the spirit of contract, strengthen the awareness of the rule of law, adhere to the rule of law, and increase the cost of illegal activities. Simplify product structure, strictly stratify customers, and truthfully report risks. Strengthen information disclosure and improve market transparency. Accelerate the construction of the social credit system, further improve the joint punishment mechanism for dishonesty, and promptly correct various illegal and irregular behaviors that mislead financial consumers.
Further strengthen the Party’s leadership over financial work. The most fundamental way to do a good job in financial work is to adhere to the centralized and unified leadership of the Party, which is our biggest institutional advantage. In recent years, we have seen in our work practice that a series of risk events and corruption cases have occurred in the financial field, mainly due to the serious weakening and lack of Party leadership and Party building. In recent years, the experience of dismantling financial risk points has shown that strengthening the leadership of the Party is the most fundamental and effective measure. Financial institutions that implement risk management and restructuring should, in principle, establish temporary party organizations. For risk institutions with complex equity relationships, the first step is to strengthen the leadership responsibility of the party. We must severely crack down on financial corruption, resolutely investigate and punish the collusion of interests behind risks, organically combine investigating cases, preventing and controlling risks, recovering losses, blocking loopholes, and reshaping culture, and accelerate the construction of a long-term mechanism for the healthy development of the financial industry. (Guo Shuqing, Secretary of the Party Committee of the People’s Bank of China and Chairman of the China Banking and Insurance Regulatory Commission)
(Source: Chinese government website)