Mr. Xiang Junbo, Deputy Governor of PBC

At the Opening Ceremony of Lujiazui Financial CultureWeek and Lujiazui International Financial Forum

Shanghai, 1 September 2006

Honorable DeputyChairman Jiang Zhenghua of the Standing Committee of NPC,

Ladies andgentlemen,  

I’m very pleasedto attend this Financial Culture Week. My topic today is harmoniousfinancial development: the expectation of the world’s economy and financialIndustry. And I’d like to speak from the following three aspects.

First, theenormous contribution China has made in the balanced global economicdevelopment.

China’s economy has achieved sustained and rapiddevelopment in the past two decades. With the increase of aggregate strength, China is playing a bigger role in the world’s economy. In2004, China became the sixth largest economy with itsGDP accounting for 4.4% of the world’s total output. In 2005, China became the world’s fourth largest economy. The sizeof China’s manufacture industry ranks the fourth inthe world, and the output of more than 170 sectors ranks the first. In 2005, China’s external trade ranked third in the world,accounting for 6.5% of the global aggregate. In 2003, the FDI inflow, for thefirst time, surpassed that into the US to become thelargest in the world; in 2005, foreign investment in Chinaaccounted for 6.7% of the world’s total. Between 2002 and 2004, China’s contribution to global economic growth was 13.8%,16.7%, and 14.5% respectively. It is fair to say China’srapid economic growth is becoming more and more important to global economicstability and growth.

The globaleconomic imbalances have become one of the major issues confronting the world’seconomy, as reflected in the huge current account and rising fiscal deficits inthe US on the one hand, and continuous expansion of trade surplusand foreign exchange reserves in some Asian economies and major oil exporting countrieson the other. The causes of economic imbalances are very complicated and toresolve it requires concerted efforts. In recent years, China has, with a view to improving the balance of BOP,adopted various effective measures to boost domestic demand, reduce savingsrate, increase import, open up market, and reform the exchange rate regime.With respect to domestic demand, measures such as tax reduction, increase ofhousehold income, speed-up of rural infrastructure building, and expansion offinancial service to individuals were adopted. And we have also quickened thepace of reform of pension system, health service system, education system andthe cultivation the residential mortgage business in order to lower savingsrate. All these measures indicate that Chinais seeking to rely less on export and more on domestic demand to achieve growth.This will contribute to a more balanced development in Chinaand the world at large.

The sustained andrapid development of China’s economy has played an important role inthe balanced development of global economy. Global consumers have benefited alot from good and cheap goods from China. Companiesespecially the multinational ones get great profits from their investment ortrade with China. Some western economists have pointed outthat it is the good and cheap Chinese exports that made 10 years oflow-inflation and continuous economic growth possible. According to theestimates of the European Central Bank, without the positive factor of cheap Chineseexports, the price index of the Euro zone would have risen 2 percentage pointson average from 1996 to 2005. At the same time, China’ s economic development patterncharacterized by high input, hugh energy consumption and low domestic demandhas brought about domestic imbalances. In terms of industrial structure, somecapital intensive sectors such as the manufacturing sector have witnessed rapiddevelopment and become engines of China’s economic development.But agriculture and modern services have lagged behind. With respect to regionaldevelopment, while the coastal areas in East China has put in place a virtuouseconomic development mechanism, vast middle and western areas have developed relativelyslowly. As for the driving force of economic development, despite highinvestment and export growth rate as well as excessive energy consumption, growthof China’s per capita national income has been slow,and domestic consumption remains slack. Some rural areas even haven’t got outof poverty. So China’s economic development mode must be transformedto support balanced development between eastern, middle and western area aswell as urban and rural areas through boosting domestic demand and a new typeof industrialization.

Second,harmonious financial development is an important part of the balanced economicdevelopment.

Financial industryis the core of modern economy. Linking commodity market with factors ofproduction markets and bridging production, distribution, and consumption,finance plays an essential role in resource allocation. With the deepening of China’s economic reform, financial industry became more andmore market oriented, and the enhanced role and position of financial industryenable it to contribute more to sustained economic development and globaleconomic adjustment.

First, we havebuilt a diversified and multi-layered system of financial institutions and of financialmarket that supplement each other. At the end of 2005, the total assets in bothdomestic and foreign currencies of banking sector, securities sector andinsurance sectors combined reached 5 trillion US dollars, about 2.5 times ofGDP. The assets of the banking sector stood at 37.5 trillion RMB, 2.06 times ofGDP. At the same time, the development of money market, capital market andinsurance market also made headways. The non-tradable shares reform progressed smoothly,and some institutional issues restricting the development of capital market hasbeen gradually resolved.

Second, theimprovement of financial macro-management system has helped support the stableand rapid development of national economy and maintain price stability.Market-based interest rate reforms have made important progress with financialmarket interest rates basically liberalized. The upper limit of lending rates andlower limit of deposit rates have been liberalized, and financial companieshave more autonomy in pricing.

Third, the reformof exchange rate regime has advanced significantly. On July 21^st, 2005, China reformed its exchangerate regime and adopted a managed, floating exchange rate regime based onmarket supply and demand with reference to a basket of currencies. Practiceshave proved that this reform are consistent with the fundamental and long-terminterest of domestic and global economy, and reflects the direction and goal ofChina’s market-oriented reforms.

Forth, theshareholding reforms of state-owned commercial banks produced good results. TheCCB and BOC have been successfully listed in Hong Kong, and BOC also issued A shares in the domestic market. The ICBC hasalready established a shareholding company, and the value of domestic financialasset has been maintained and increased.

Fifth, theopening-up of the financial industry is conducted in an all-around way, andinternational financial cooperation has been improved. At the end of 2005, 25foreign banks made equity investment in 20 domestic banks, and some foreignbanks or investors invested in several banks. The number of cities that havebeen opened for RMB business has increased from 18 to 25. China has fully fulfilled its WTO commitment with respectto market access and business scope in securities and insurance sectors.

China is still a developing country in transitiondespite its achievement in financial reforms and development. There are manyissues and challenges facing the financial industry. The financial industry cannotfully meet the requirement of economic development in the process of transformingeconomic growth pattern. More efforts should be made to build a harmoniousfinancial system compatible with the comprehensive, balanced and sustainableeconomic development. To be explicit, we will make efforts in the followingaspects:

First, harmonizethe relationship between economic and financial development. The ultimate goalof financial development is to promote economic development. So the scale and structureof financial industry should serve the need of economic development. But atpresent, the development of China’s financial industry is lagging behind. China’s share in international financial market is stillvery limited despite its increased involvement. The trading volume of China’sforeign exchange market is very small compared with the $2.41 trillion tradingvolume per day of the global forex market; The trading volume of China’s stockmarket is only 1% of the daily transaction in international stock market; Thetrading volume of China’s bond market is only 3.7% of the outstanding balanceof bonds in the US market, and bonds in China are far less diversified; Thespot transaction volume of the Shanghai gold exchange, although large, is lessthan 1% of the London gold market. So we should pool our efforts to enhance theweight of financial industry in national economy. And during the process, weshould well handle the relationship between scale expansion and riskprevention, scale quality and scale profit, improve ability of management andrisk prevention, cultivate the virtuous interaction between finance andeconomy, and thus build up the harmonious relationship.

Second, foster a harmonioussystem for financial institutions. The soundness of this system means financialindustry can satisfy the needs of participants at different levels. Bankingsector especially big banks still dominate the financial industry despite therelatively complete financial system. Small and medium sized companies, especiallysmall ones with innovative capability can not get loans from prudently managedbanks due to their uncertainty in development and the lack of credit record andproduction scale. And this limit of China’s financialsystem hinders its shift from investment-driven growth to one driven bytechnology advance and pursuit of efficiency, featuring knowledge economy andinformation. So the system for financial institutions should be bettered so asto provide good financial service for various economic agents.

Third, build a harmoniousfinancial market. Not a capital rich country, China’sfund cost should not be very low. But current interest rate cannot reflect realfund cost due to the absence of market-based pricing mechanism. As a result,some fund-consuming and over-productive sectors cannot be driven out of marketin time, and the ineffective allocation of resources exacerbates economicimbalances. An improved and integrated financial market system is the preconditionand basis of effective financial resource allocation. Unless fund flows orderlyin different markets, interest rates cannot reflect real market supply anddemand, and energy saving, efficient industries cannot be cultivated. Variousfinancial markets including money market, capital market exist in China, butthe small number of market participants, the inadequate products, and theexcessive restriction all hinder the free movement of fund among differentmarket, and therefore affect the effective fund allocation. We need to have thedevelopment of financial markets, analyze the relationship between them so asto enhance the balanced development between basic financial product market,derivative market, money market, capital market, foreign exchange market andhome currency market.

Fourth, promotethe development of regional financial industry in a harmonious way. Financialdevelopment is an important force driving regional development. Sufficient fundinjects vigor into the regional development, while the lack of it harmsregional development. A comparatively sound and strong financial system andfinancing system have been set up in eastern China,but lending of state-owned commercial banks is still the dominant financingmethod in the middle and western region. In some less developed rural areas, thefinancial system, instead of supporting economic development, has become amajor channel for fund outflow and prevented capital formation. So, regionalfinancial development must be harmonized to promote balanced economicdevelopment. To achieve this goal, the following aspects must be emphasized.First, regional financial institutions should be encouraged to facilitate balancedeconomic development. Special emphasis should go to the cultivation of ruralfinancial service system to improve the insufficient, weak financial service inrural area. Second, regional financial cooperation should also be highlighted. Theinfluence of financial sector in developed regions should be extended, and theconflict between various regional financial development should be coordinated. Fiscalsupport should also be balanced with financial support to increase the multipliereffect of the latter.

Fifth, blueprintthe harmonious reform, development and opening-up of financial industry. Thedevelopment of China’s financial industry benefits from itsopening up. During the opening-up process, we have learned how to employfinancial instruments and international capital to serve economic development,and domestic financial institutions have improved their management amid marketcompetition. So it has always been China’s basic policyto further open up its financial industry. Chinawill honor its WTO commitments to open the financial industry on schedule andsome commitments have already been materialized ahead of schedule. Butinternational practice also tells us over-hasty financial opening-up incompatiblewith the economic and financial development will exacerbate the vulnerabilityof financial system and thus leads to financial crisis. This will negatively affectthe world economy. Faced with many issues such as the industrial sector imbalanceand the weak financing channels, China’s financial opening-up will be a long andarduous process. At the same time, financial opening-up also needs a relativelyrelaxed international environment. We will make efforts towards this end. Wealso need the understanding and support from the international society.

Third, Shanghai’s growth as the international financial center willplay an important role in building a harmonious financial system

To build Shanghai into an international financial center is a nationalstrategy established in 1992. This strategy has two aims: one is to promoteeconomic and financial development of the Yangtze River Delta and even thewhole country; the other is to develop Shanghai into a window for China’s opening-up, foreign capital utilization andinternational financing. Thanks to fourteen years’ development, Shanghai has become the most financially advanced city in China.

Shanghai’s international financial center build-uphas taken up new responsibilities in the new era characterized by the shift ofdevelopment mode and the harmonious economic development. A financial centerbasically undertakes the function of financial intermediary and is the corepart of resource allocation. Home to lending, securities, foreign exchange, andinsurance transaction, and sensitive to market changes, a financial center can mobilizeand distribute huge funds quickly, effectively allocate financial and economicresources. An international financial center, also a center of economic andfinancial information, reflects regional and global economic changes, andrealizes the price discovery function. The world’s major internationalfinancial centers have always had the above features.

To build Shanghai into an international financial center contributes tothe cultivation of a nationwide financial system, the improvement of financial organizationsystem, the growth of financial markets, the cooperation between regionalfinancial institutions and the further opening up of the financial industry. Shanghai’s growth as a financial center will serve the wholecountry, and promote the stability and development of the entire globaleconomy. We hope that the experts participating in the Financial Culture Weekcan come up with suggestions and proposals on transforming Shanghai into an international financial center. And we alsohope this Financial Culture Week will be a bridge for further exchange and cooperationbetween Shanghai and various international financialcenters and contribute to the harmonious economic and financial development inthe world.