The People's Bank of China--Speeches

Summing-Up Speech at the 1^st China Finance Forum

Governor Zhou Xiaochuan

Fellow Participants,

Good afternoon. It is a great pleasure to attend this Forum and join you in the lively and in-depth discussions. Let me share with you some conclusions that I have got in my study and research.

The definition of financial eco-environment had been used in the academic community before I came up with it. I thought it was a very good definition and followed it in my studies. We indeed need to pay attention to this topic in the process of promoting financial reform and development, explore it at a theoretical level and put into practice the discoveries.

First of all, the objective of financial reform is to maintain financial stability, ward off financial risks and help the financial industry to achieve a steady and rapid growth, which will in turn contribute to sustainable and quick development of the national economy. Financial restructuring is a systems engineering project that covers both macro and micro levels.

To be more specific, there are four aspects to it. The first is the reform of financial institutions. The second is improvement of financial eco-environment, including eco-environment at the macro level, such as governmental, judicial and legislative climate and local eco-environment. The third element is adequacy of supervision, to be achieved by improving institutional arrangement and supervisory approach as well as intensifying supervisory practice. The fourth one is macro financial policy environment, such as interest rate policy, exchange rate policy and flexibility of market pricing. Financial reform has to dissolve the historical burden, and create conditions for long-term development as well.

An example is the eco-system of aquarium. Fish is the most important component of this system, like financial institutions in the financial eco-environment. To survive and "swim around", financial institutions must be in good health. Therefore, the reform of these institutions is vital. We have always emphasized deepening reform of financial institutions and stepped up efforts in this area. Furthermore, we need to look at external eco-environment. As in the aquarium, the external environment, including aquatic grass, plankton and oxygen, is the necessary condition for the survival and growth.

As the eco-system of aquarium needs to be regulated by rules, financial supervision is essential to functioning of financial system. Macro adjustment and control is like the water temperature. If the water is too cold, some fish will be frozen to death; if the temperature is too high, the water will lose oxygen; also, the water temperature must not fluctuate. These essential elements work together. Financial institutional reform is a systems engineering project that requires concerted efforts of all sides. We at the central bank have already taken into consideration historical burdens of the banking system, and worked to create a favorable condition for banks to dissolve these burdens and achieve growth by providing adequate interest levels to form an appropriate spread and promoting financial innovation.

To achieve financial stability, we cannot have a one-track mind and fail to pay attention to external environment while emphasizing the reform of financial institutions. Conversely, when we focus on external financial eco-environment, it does not mean external environment is the solution to all questions.

Financial eco-environment has two layers. The macro layer includes legislative system and law enforcement environment. In the legislative system, there are Law on Commercial Bank, Law on Insurance, Law on Securities, Law on Negotiable Instruments, Law on Guarantee and other regulations. I want to emphasize Law on Enterprises Insolvency because of its role in maintaining a normal financial eco-environment. We have high expectation for this law, which is being amended at the moment.

We have been trying to answer the question why financial sectors in different regions of China vary a lot in terms of soundness and health. Unlike small open economies with good internal liquidity, China has significant regional differences, as can be seen from many data. But we do not know the reason of such differences yet. Some believes that it is related to the degree of richness of a region, that is, a poor region is likely to have poor asset quality and bad indicators whereas a rich region has high quality asset and good indicators. For example, coastal provinces are good while the central provinces are less good and western provinces are worse. Empirical analysis seems to prove this observation. But, let me give you another example. A decade ago, Guangdong, a coastal province, also the richest in China, with a high GDP growth rate, the so-called Enping Incident in China Construction Bank took place, and similar problems also occurred in other financial institutions. Then, administrative intervention in financial institutions and lack of order in lending decision produced large amount of problem assets. Later, many problems were exposed in this rich and highly developed province in the aftermath of Asian financial crisis, such as connection lending, distortion in credit culture and high loan loss. Local government had to borrow money to dispose of historical burdens. In this sense, financial eco-environment is not necessarily related to the level of prosperity. Is it related to what happened in the past? Let us have a look at rural credit cooperative reform. You may know that an incentive measure was adopted for those rural credit cooperatives with a negative net value at end 2002. If they could dispose of half of the historical burden on their own, they would be eligible for central bank support in the form of central bank bill or in another form. As a measure designed to encourage bad asset disposition on the part of credit cooperatives by providing policy support, it was applicable nationwide. But it may not be applicable to every one of the more than 30,000 rural credit cooperatives in the country. Although small in size, some rural credit cooperatives are well run and with a positive net worth. As such, they are not eligible for this policy support. Some people are of the view that rural credit cooperatives in poor areas were not viable because income from interest rate spread was low as a result of low level of deposit taking per staff member. As a matter of fact, rural credit cooperatives at the coastal regions incurred sizable per staff member cost and salary although their income from interest rate spread was high; in comparison, those credit cooperatives in western China may have lower income from interest rate margin but also incur smaller per staff member cost and salary. Thus, deposit taking per staff member is not a reliable indicator. We paid attention to this problem in policy implementation and provided certain support to these rural credit cooperatives.

Some research institute believes that a few factors are directly related to financial eco-environment. First of all, regions that trade heavily with foreign countries and receive large amount of FDIs usually offer good financial eco-environment. This is because enterprises receiving FDIs are mostly export oriented and produce very marketable goods. Also, local governments usually welcome foreign capital and promote foreign trade by offering policy support and protection to enterprises. They do not engage in administrative intervention.

The second factor is credit culture building in the locality. In the past, some provinces and cities suffered from bad credit environment. They received few investments and had low level of business transactions. Banks did not find such a credit environment attractive either. In recent years, these cities have regarded credit culture improvement as their first priority and worked very hard to build such an environment. In two to three years, there work has produced visible results.

Regional differences do exist when it comes to eco-environment. The vast difference as reflected in some figures is sometimes hard to understand. Study and analysis should be intensified. Some of the conclusions might not be tenable because the analysis fails to grasp the crux of the issue, but analysis and study helps to deepen our understanding of these matters. I hope research institutes including research arm of the PBC and commercial banks, media, seminars and workshops will pay more attention and do more in-depth research on these matters.

I have noticed that many commercial banks have done valuable work in this area. The next step is to intensify information exchange for common benefit. This will help banks to arrange their funds properly and improve lending decision, at the same time this will promote local awareness for competition and the need for building a good financial eco-environment. Thus, financial eco-environment, as well social progress at large, will benefit from it. At this information age, people can have access to information through various channels and conduct their own study. People pay a lot of attention to what research institutes, commercial banks and other financial institutions say about regional differences in eco-environment. At the same time, research over such differences will be an impetus for government agencies to take legislative and judicial measures and step up macro adjustment and control and financial supervision to build a good eco-environment.

I believe that so long as we work in all four areas, i.e. financial institutions reform, financial eco-environment improvement, financial supervision and macro policy improvement, in an integrated manner, we will be able to further intensify financial system reform, help the financial sector develop in a sound manner and contribute to the sustained, and rapid economic development in China.

Thank you.