In its 16th issue of 2020, the Qiushi journal published the article Unswervingly Fight the Critical Battle of Preventing and Defusing Financial Risks authored by Guo Shuqing, Secretary of the CPC Committee of the People’s Bank of China (PBC) and Chairman of the China Banking and Insurance Regulatory Commission (CBIRC). The main content is as follows:
At the 19th CPC National Congress, it was stated that in order to secure a decisive victory in building a moderately prosperous society in all respects, we must win three critical battles, and one of the battles is to prevent and defuse major risks. General Secretary Xi Jinping emphatically pointed out that the key to preventing and defusing major risks lies in the prevention of financial risks. In recent years, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping at its core, crucial progress has been secured in the critical battle of preventing and defusing financial risks. The unexpected outbreak of the COVID-19 pandemic has severely compromised the normal functioning of both domestic and international economies, and brought about many new financial risks and challenges. Nevertheless, as there is no turning back, we must cope with the situations with aplomb, confront difficulties head on, and strive to achieve a long-term equilibrium between ensuring stable growth and preventing risks, thus providing solid financial support for building a moderately prosperous society in all respects.
I. Safeguarding financial security is crucial to China’s overall economic and social development.
General Secretary Xi Jinping pointed out time and again that finance is the core of modern economy, providing the lifeblood for the real economy; that financial vitality will lead to economic vitality, and financial stability is of vital importance to economic stability; and that financial security is an important part of national security, and safeguarding financial security is a strategic and fundamental matter for China’s social and economic development. It is of great responsibility to ensure sound functioning of the financial system, and no negligence or slacking is allowed.
Since the reform and opening-up, China has made historic progress in its financial sector, and established a modern financial system with Chinese characteristics. By relying on Party leadership and leveraging the institutional strength of socialism, in the spirit of self-revolution, we have taken the initiative to eliminate hidden dangers and successfully overcome various hits and shocks, including the serious inflation in the late 1980s, economic overheating in the mid-1990s and a number of external risks. In this way, we have not only provided a relatively stable financial environment for China’s economic and social development, but also contributed to the world’s financial stability and development.
Since the international financial crisis in 2008, the international economic and financial situations have become more complex and volatile, and a combination of cyclical, structural and institutional problems in the Chinese economy have made the landscape of financial risks more complex and challenging. As the balance of payments gradually improved, the leverage ratios of domestic enterprises, governments and the household sector rose rapidly. Financial products and market structures became increasingly complex with a low degree of transparency. More and more funds circulated within the financial system without entering the real economy or were diverted out of the real economy. Some illegal financial groups and illicit financial activities grew frantically. Moreover, corruptions and violations of disciplines and regulations within the financial system continued to spread. If these problems had been left unattended, they would certainly have bred systemic risks, produced disruptive effects and severely endangered the sustainable economic development and China’s political security.
Since the 18th CPC National Congress, faced with the challenging landscape of risks, the CPC Central Committee with Comrade Xi Jinping at its core has gained profound insights into the situations, made keen judgments, and acted resolutely in decision-making. Shortly after the closing of the 18th CPC National Congress, General Secretary Xi Jinping exhorted the whole party that we should attach great importance to the risks and hidden dangers in the fiscal and financial sectors, and hold the bottom line that no systemic financial risks should occur. At the Central Economic Work Conference in late 2016, it was explicitly required that “greater priority should be given to preventing financial risks.” In 2017, General Secretary Xi Jinping personally planned and arranged a series of major measures to “prevent risks, address irregularities and shore up weak links,” launching a preliminary campaign for the critical battle against risks. The important remarks made by General Secretary Xi Jinping on the financial work shed light on the fundamental and strategic issues in the financial sector, constituted a systemic and general plan for preventing and defusing financial risks, and provided us with a cardinal principle for securing good performance in financial work in the new era.
II. Substantive breakthroughs have been made in the critical battle of preventing and defusing financial risks.
In line with the decisions and arrangements made by the CPC Central Committee and under the command of the State Council and the Financial Stability and Development Committee (FSDC) under the State Council at the forefront, all local authorities, all government departments and the financial system made concerted efforts to push forward the work, and made remarkable achievements in the critical battle of preventing and defusing financial risks.
The reckless expansion of financial assets has been fundamentally reversed. From 2017 to 2019, the annual growth rates of credit funds and bond investments of the banking sector in support of the real economy reached as high as 12.1 percent and 13.9 percent, respectively. In contrast, the average annual growth rate of assets registered only 7.7 percent, less than half of that from 2008 to 2016, indicating an increase of RMB64 trillion funds injected into the real economy and a decline of RMB88 trillion in the asset growth of the banking sector.
The aggressive investment and wealth management businesses in the insurance sector were curbed, and the proportion of short and medium-term premiums in the life insurance business dropped from a historic high of 31 percent to 4 percent. The leverage ratio of the corporate sector remained generally stable with a slight decline, and those of the household and government sectors grew at a slower pace. The macro leverage ratio, reversing the average annual growth of over 10 percentage points from 2008 to 2016, basically stabilized at around 250 percent in the past three years.
The risks of shadow banking have continuously contracted. Shadow banking in China used to be exposed to high risks. Featuring multi-layer nested investment and elusive risks, shadow banking was closely intertwined with real estate bubbles, implicit debt of local governments, and illegal Internet financing, etc. Starting from 2017, intensive measures have been taken to rectify market disorder related to interbank wealth management and off-balance-sheet businesses. After the implementation of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions in 2018, preliminary results have been achieved in making a fundamental improvement of the market with efforts made over the past years. At end-2019, the size of shadow banking decreased by RMB16 trillion from its peak. The interbank wealth management business, interbank investment business and asset management business of securities companies shrank by 87 percent, 26 percent and 42 percent, from their peaks, respectively. Entrusted loans, trust loans and various types of cross-market financial investment products continued to decline. Some international organizations and specialized institutions spoke highly of these efforts, noting that China had achieved the most significant progress in mitigating the risks of shadow banking and fundamentally safeguarded the stability of its financial system.
Vigorous steps have been taken for the recognition and disposal of non-performing assets (NPAs). To address the widespread problem of untrue asset quality, examinations and evaluations were conducted on financial institutions (FIs) from multiple perspectives, and stringent requirements were laid out for the prudential classification of risk assets. Stepped-up efforts were made to crack down on the misconducts of covering up NPAs or cooking the books. The ratio of loans overdue for more than 90 days to non-performing loans (NPLs) of commercial banks once exceeded 128 percent in 2016, and fell to 82 percent at end-2019. From 2016 to 2019, RMB5.8 trillion worth of NPLs were disposed in the banking sector, which exceeded the sum of NPLs disposed of in the previous eight years. In the meantime, sped-up capital replenishment and increased provisions comprehensively strengthened the capability of various FIs to respond to external shocks.
Rigorous measures have been taken to punish law breaking and corruption. We resolutely clamped down on illegal financial groups and illicit financial activities, and pushed forward asset liquidation, corrupt proceeds and loss recovery and risk isolation in an orderly manner. Efforts were also made to protect legitimate incomes, ban illegal incomes and deal with problem shareholders who maliciously manipulate FIs in accordance with laws. The Baoshang Bank was taken over according to the law. During the takeover, measures were taken to sufficiently protect the legitimate interests of depositors, break the rigid payment, promote credit stratification and strictly enforce market discipline. Enterprises which seriously violated laws and regulations, such as Anbang Insurance Group Co., Ltd. and CEFC China Energy Co., Ltd., were addressed according to the law, and several holding companies suspected to be illegally engaged in financial businesses were restructured, reorganized and liquidated in a timely manner. Small and medium-sized banks and trust companies with high risks have undergone restructuring and risk resolution with “targeted measures for each enterprise.” A number of corrupt officials who were engaged in business collusion, tunneling or embezzlement have been brought to justice, among which some were officials from financial regulatory departments who “did an inside job.”
Internet financial risks have been reduced substantially. There used to be a great number of “unlicensed” platforms which were illegally engaged in financial activities, and many of them operated in the name of financial innovation or “Internet Plus” initiatives to confuse the public. After intensive rectifications, Internet financial risks decreased significantly, and rampant unlicensed businesses were curbed. An array of illegal Internet wealth management, insurance and securities companies, funds and token institutions were cracked down on. The number of peer-to-peer (P2P) Internet lending institutions in operation nationwide was decreased from the peak of around 5,000 to 29 at end-June 2020, and both the size of P2P Internet lending business and the number of participants dropped for 24 consecutive months.
The debt risks of large and medium-sized enterprises have been defused in an orderly manner. By end-2019, around 20,000 creditors’ committees of banking FIs had been established across the country, and the volume of investment in market-based and law-based debt-for-equity swaps reached RMB1.4 trillion, which helped many enterprises with development potentials to tide over difficulties. The risks of bond default and stock pledge of many enterprises with liquidity difficulties were mitigated, and a considerable number of “zombie enterprises” with backward production capacity or poor management were cleared in an orderly way. Approximately 500 large and medium-sized enterprises have implemented pilot programs of joint credit extension, which enhanced the endogenous motivation of debt restraint.
The growing tendency of real estate financialization and bubble forming has been contained. Real estate bubbles are the biggest “gray rhino” threatening financial security. In recent years, local authorities and government departments have acted on the principle that “houses are for living in, not for speculation,” employed “specific measures suited to the cities’ individual conditions,” optimized the allocation of financial resources, and strictly guarded against the illicit flow of funds into the real estate market. In 2019, the growth of real estate loans and the proportion of new real estate loans in the total increments dropped 12 percentage points and 10 percentage points, respectively, compared with the level in 2016. This can not only satisfy the normal needs of the stable development of the real estate sector, but also avoid any larger risk caused by an excessive concentration of funds.
The implicit debt risks of local governments have been initially brought under control. Implicit debts are a potential trigger of financial risks. In recent years, China has exercised strict control over the financing increments of local governments, and prohibited illegal provision of financing. Meanwhile, measures have been taken to allow proper forms of financing while curbing irregularities, and to unwind the outstanding implicit debts in an orderly manner. The financial system has also worked actively to cooperate with local governments on debt replacement. The sale of local government bonds over the counter of commercial banks to individual investors has been encouraged, which provided a variety of funding support for local government debt newly issued according to law. In the past three years, banking and insurance institutions have accumulatively increased their holdings of local government bonds by RMB11 trillion.
A long-lasting mechanism which tackles both symptoms and root causes has been gradually improved. From 2017 to 2019, regulators worked to hold FIs and financial professionals strictly accountable for their violations of laws and regulations, imposing 8,818 penalties on banking and insurance institutions and 10,713 penalties on persons liable, with the volume of fines and confiscation amounting to RMB7.24 billion, more than the sum over the past dozen years. With efforts to shore up institutional weaknesses, the regulatory work has been further integrated into the framework of rule of law. Since 2017, a total of 209 pieces of regulations and normative documents for the banking and insurance sectors have been rolled out. The FIs’ development philosophy and business models, which tend to prioritize speed over quality, have been largely corrected.
The quality and efficiency in serving the real economy has been raised markedly. From 2017 to 2019, RMB loans registered a growth of RMB46 trillion. Specifically, loans issued to infrastructure, affordable housing projects and the manufacturing sector grew by RMB8 trillion, RMB3.3 trillion and RMB1.6 trillion, respectively. The average annual growth rates of loans to scientific and technological research, information software, and eco-environmental protection reached 31.2 percent, 20.8 percent and 19.5 percent, respectively, remarkably higher than the growth of total loans in the same period. The goal of “increasing volume, expanding coverage and lowering price” for financing of micro and small businesses (MSBs) has been generally achieved. Inclusive MSB loans registered an average annual growth of 23.2 percent. The coverage rate of basic financial services in impoverished regions neared 99 percent. In 2019, serious illness insurance covered over 1.1 billion urban and rural residents, and agriculture insurance provided over RMB3.8 trillion of risk protection nationwide. Insurance proceeds have become an important source of funding for recovery and reconstruction after various types of natural disasters.
After continuous efforts, financial risks have tended to be restrained, and the resilience of the financial system has been greatly enhanced. We have not only succeeded in preventing latent risks from evolving into financial crisis, but also created valuable policy space and room for maneuver to cope with various complexities. Past practices have proved that the CPC has made perfectly right and timely decisions and arrangements on preventing and defusing financial risks. If we had spoiled the opportunity and delayed rectifications, we would have to deal with greater difficulties and the adverse consequences would have been immeasurable.
III. Major challenges have emerged in the financial sector since the breakout of COVID-19 pandemic.
During a critical period of transition to high quality growth, the Chinese economy have run into difficulties such as accelerated population aging, the decline in the savings rate and greater environmental and resource constraints. The once-in-a-century pandemic directly caused a sharp decline of the Chinese economy in Q1 this year. Though its growth returned to positive in Q2, the economy still faces many uncertainties in its development in the short and medium term. According to the projection of Global Economic Prospects, which was released by the World Bank in June, the global economy is expected to experience a 5.2 percent contraction in 2020. For some time to come, the Chinese economy will suffer from the pressure from both the supply and demand sides, and in both the domestic and overseas markets. The financial system will undoubtedly encounter great difficulties.
To curb the recession, when economic activities sharply contract, financial activities must expand instead. Previously, the policy target was to ensure that the growth of broad money supply (M2) and aggregate financing to the real economy (AFRE) is slightly higher than the nominal GDP growth. In H1 this year, there was a positive margin of over 10 percentage points. It is estimated that the overall leverage ratio and sectoral leverage ratios will all experience a considerable rebound in 2020, and the bad debts of FIs may markedly increase. In 2019, the banking sector recorded RMB2.7 trillion of new NPLs. Following the onset of the pandemic, or the Black Swan, the quality of assets in the banking sector will only deteriorate at a faster pace. Since there is a time lag for financial accounting to reveal such influence, the real risks have not been accurately reflected in the current asset classification. The spot book profits of banks are largely overestimated. Nevertheless, this will not last long, and more NPAs will be exposed successively.
It is essential to take macro countermeasures to offset the impact of the pandemic. If any fresh abnormal situations arose in the process of implementation, efforts in this regard would be further intensified. But we must not ignore that, in a loose financing environment, enterprises, households and governments are all likely to become more indebted. The strengthened homogeneous expectations for lower interest rates may fuel leveraged deals and speculations, thus giving birth to another round of asset bubbles. As real estate prices in some regions have started to pick up, financial resources may be once again concentrated in high-risk areas. Borrowers with relatively poor credit ratings may exploit deferred repayments or other preferential policies to maliciously evade repayment obligations for bank loans, and the high-risk shadow banking with complex structures may make a comeback easily.
Furthermore, after years of rapid development, Fintech has presented many opportunities and significant challenges. Ranking high globally in the development of Fintech in some fields, China has no ready-made experience for reference regarding risk prevention and control. The widespread application of big data, cloud computing, artificial intelligence and other advanced technologies has profoundly changed the forms and transmission pathways of traditional financial risks, and made non-traditional risks such as those concerning data security ever more prominent. As these risks may break out suddenly and are highly hidden and destructive, they deserve our great vigilance.
IV. The financial system should be committed to ensuring that the targets for economic and social development are achieved as scheduled.
In the face of the complicated and grave economic situation, the CPC Central Committee with Comrade Xi Jinping at its core has made deployments for the next stage in a timely manner. While effectively strengthening the awareness of opportunities as well as risks, we should “maintain overall stability and take a coordinated approach” to further enhance the quality and efficiency of financial services and bring economic development back on track as soon as possible; at the same time, we should “take differentiated measures and defuse bombs with precision” so as to resolve major risks in key areas in an orderly manner and achieve a long-term balance between stabilizing growth and preventing risks. The following tasks are especially important for the current stage.
All-out efforts should be made to bring the circulation of the national economy back to normal. The financial sector and the real economy share common stakes. Serving the real economy is not only the duty and purpose of the financial sector but also the fundamental means to guard against financial risks. Just as an old saying goes, “With the rise of agricultural, industrial, and commercial trades emerge currencies in various forms.” Currently, the overarching task is to fully restore the industrial cycle, the market cycle as well as the economic and social cycle on the condition that a resurgence of the pandemic is strictly guarded against. Committed to ensuring stability on six fronts, namely, employment, the financial sector, foreign trade, foreign investment, domestic investment, and expectations, and to maintaining security in six areas, namely, employment, people's basic livelihood, operations of market entities, food and energy security, stable industrial and supply chains, and the normal functioning of primary-level governments, we should make the best use of China’s advantages in enjoying huge market potential, enormous savings resources, and wide-ranged international cooperation, and give play to the enthusiasm and initiative of government agencies at all levels. We should strengthen the synergy among fiscal, financial, employment, and industrial policies to serve the needs of all types of market entities, such as those of MSBs, and remove the obstacles to production, distribution, circulation, and consumption so that a new development pattern will be formed in China, where domestic and international circulations boost each other, with the domestic circulation as the mainstay.
We should accelerate the financial supply-side structural reform. Finance is the heart and lifeblood of the economy in modern times. It is also an important tool for resource allocation and macro regulation. As long as finance works well, it is like a right chess move making a difference across the board. Therefore, the financial supply-side structural reform plays a pivotal role in the economic supply-side structural reform. While sticking to the direction of reform to develop the socialist market economy, we should pick up pace in transforming the development mode of the financial sector. Work should be done to adapt the financial structure in line with economic and social development, promote funding facilitation, reduce costs for the real economy, and increase the efficiency of resource allocation. Corporate governance in FIs should be improved to redress insider control as well as manipulation by large shareholders. Continued efforts should be made to improve the fundamental institutions of the capital market and to guide wealth management, trust and insurance companies to step up stable long-term funding for the capital market. Moreover, we should speed up the building of the second and third pillars for old-age insurance, and increase the share of pension funds in the capital market to reach the global average.
The NPAs should be disposed of as early as possible. As credit risk is the most fundamental risk in the financial sector, toxic assets are like lesions that must be removed resolutely. Any attempt to conceal the problems or procrastinate the treatments only leads to missing the optimum timing of disposal, and ultimately causes severe consequences. The FIs need to adopt a more prudential financial and accounting system, effectively implement asset classification and fully expose NPAs. In routine supervision, we cannot simply take the rise of non-performing assets ratio as the assessment criterion. FIs shall step up the disposal of NPAs by leveraging the financial space set aside according to regulatory requirements on provisions. In addition, they need to make realistic income and profit plans, and increase provisions and capital replenishment. The policy obstructions of NPA disposal should be removed so as to create more favorable conditions for greater soundness of the financial system.
Measures should be taken to prevent high-risk shadow banking from staging a comeback. Shadow banking risks can easily break out and result in enormous impacts. Even “the rustle of leaves in the wind” may trigger “a prairie fire” and cause endless fallout. At present, owing to unremitting governance, we have put the risks of shadow banking under control to some extent. However, the soil nurturing the shadow banking has not been fully eradicated. Any slight regulatory relaxation will probably lead to a big revival, wasting all of our previous efforts. We should maintain a strategic resolve and tough stance toward high-risk businesses. By emphasizing the principle of simplicity and transparency and regulating cross-market financial products, FIs must draw a clear dividing line between publicly offered and privately offered products, isolate the risks of on-balance-sheet businesses from those of off-balance-sheet businesses, ensure separate-account management of entrusted and proprietary businesses, and differentiate savings products from investment products. Efforts should be made to clearly define the function of stock market, bond market, credit market and money market with orderly division of work. We should continue to rectify Internet financial risks and crack down on illegal fund-raising and other financial activities violating laws and regulations.
Different types of institutions’ risks should be resolved in a timely manner. We should take targeted and effective measures to address institutions with different risks. For high-risk financial groups, their risk resolution should, in line with laws and regulations, be advanced according to existing plans and division of work. Maintaining a generally stable status of county-level incorporated bodies, rural FIs are encouraged to replenish capital and introduce strategic investors in various forms. For city commercial banks, trust companies and other locally incorporated institutions, provincial governments will be supported in formulating and implementing resolution plans with strengthened professional guidance of financial regulators. A list of domestic systemically important banks should be developed as soon as possible, while recovery and resolution plans should be made for institutions on the list. For problematic institutions, an effective risk resolution mechanism should be set up. FIs shall perform primary responsibilities with the shareholders, especially principal shareholders, assuming important responsibilities. Local Party committees and governments shall fulfill jurisdiction duties by integrating the responsibility of Party leadership at the local level, the responsibility of managing local state-owned financial capital, and the responsibility of resolving local risks and safeguarding social stability within their jurisdiction. Financial regulators shall assume primary regulatory responsibilities. The deposit insurance system and institutional system shall be perfected to fully leverage the role of early intervention, early warning and early resolution.
The opening-up of the financial sector should be steadily broadened. Following the guideline of autonomy, orderliness, equality and security, we will strive to realize financial opening-up at a higher level without compromising financial sovereignty. We will step up efforts to construct an open, transparent, stable and predictable regulatory policy environment, and encourage domestic and overseas FIs to compete on an equal footing, deepen cooperation, learn from each other and promote innovation. We should consolidate the capability of macro financial management as well as risk prevention and control under the open circumstances, so as to identify in time and effectively contain the spread of external shocks into domestic markets. We will actively engage in international financial governance and the formulation of regulatory rules, promote international coordination on macro policies, and increase China’s voice in the international arena.
Solid work should be done to enhance financial consumer education and protection. We should make greater endeavors to publicize financial knowledge, helping both urban and rural residents understand that investment is not risk-free and there is no financial product featuring high returns yet low risks, let alone the so-called wealth management program that “guarantees profits.” In other words, any product advertised to ensure “protected principal with high yields” is financial fraud. Both institutional and individual investors should develop the awareness of value investment, rational investment and risk prevention. We should promote the spirit of contract, consolidate the awareness of rule of law, act in strict accordance with the law, and increase the costs for violation of laws. Product structures should be simplified, client layering rigorously implemented, and risks honestly reported. Information disclosure should be enhanced to make a more transparent market. The construction of the social credit system should be advanced and the mechanism for joint punitive action against bad faith further improved, so as to correct all kinds of violations that mislead financial consumers in a timely way.
