Yi Gang: Speech – 12th Lujiazui Forum
Honorable Vice Premier Liu He, Secretary Li Qiang, Mayor Gong Zheng,
Ladies and gentlemen,
During Secretary-General Xi Jinping’s inspection tour to Shanghai last November, he noted that Shanghai should “strengthen its function of allocating global resources and actively allocating global resources, including capital, the information, technology, talents and assets, ”which indicated the direction for the development of Shanghai as an international financial center. The speech by Vice Premier Liu He is very important and very informative for our financial work. I also fully agree with the speech just made by Secretary Li Qiang in his speech on accelerating the construction of Shanghai as an international financial center.
At the previous Lujiazui forum, I proposed the “five centers” that we should focus on to make Shanghai an international financial center. Here I would like to discuss the “Five Centers” in more detail with you.
First, Shanghai is emerging as a center of RMB denominated asset allocation. That is, when world class investors consider investing in RMB denominated assets, they will consider Shanghai as their first choice. Global institutional investors can conveniently conduct cross-border investing and financing activities here. Notably, China’s economic fundamentals remain strong, with monetary policy within the normal range. RMB interest rates are at the lowest level among developing countries, but there is a relatively remarkable positive deviation from the interest rates of major convertible currencies. In this sense, assets denominated in RMB are quite attractive for a global allocation of capital.
Second, Shanghai is emerging as a risk management center of RMB-denominated financial assets. After investing in RMB denominated assets, investors, domestic and foreign, are required to diversify and manage their risks on an ongoing basis. In Shanghai, all factors related to risk management are improving. First, in terms of pricing, continuous pricing has been carried out for all RMB denominated asset classes. Second, in terms of transaction, the RMB financial market enjoys adequate liquidity as well as solid depth and breadth, allowing buying and selling at any time. Third, in terms of risk hedging, a relatively comprehensive basket of risk management tools, including financial futures, commodity futures, interest rate derivatives and currency derivatives, is in place to support effective risk coverage. Fourth, in terms of information disclosure, the increasingly enhanced transparency and stringent information disclosure requirements in recent years are continuously enhancing investor confidence in RMB-denominated assets. With the above four risk management factors, investors are able to manage and diversify risk more effectively.
Third, Shanghai is becoming a center of financial openness. The world’s international financial centers must be open, as openness is a prerequisite for attracting top-notch financial institutions and financial talent. In recent years, Shanghai has accelerated its financial opening, with a multitude of world-renowned financial institutions setting up offices in the city one after another, and the city has become much more attractive to the world’s top financial talent. whole. In the meantime, the capacity for financial regulation should be adapted and compatible with the level of financial openness. Ensuring financial security in a context of financial openness brings real security.
Fourth, Shanghai is becoming a demonstration center of a high-quality business environment. A market-oriented, law-based and internationalized business environment is gradually taking shape in Shanghai. As professional institutions, such as financial courts and financial arbitration agencies, have been successively established, Shanghai has become the best testing ground for innovative rules and standards of financial operations. In its development as an international financial center, Shanghai can be at the forefront of the convertibility of the capital account and the facilitation of the RMB as a freely usable currency. As long as regulatory requirements for combating money laundering, terrorist financing, and tax evasion are met, funds intended for normal business and investment activities can freely enter and exit Shanghai.
Fifth, Shanghai is becoming a FinTech hub. Fintech being essential to the development of Shanghai as an international financial center, it is currently accelerating the pace of its construction into a Fintech center. Efforts have been made to explore the wide application of artificial intelligence, big data, cloud computing and other new technologies in the financial sector.
Regarding the development progress of Shanghai as an international financial center, Shanghai Financial Work Bureau collaborated with two universities on a very inspiring professional assessment. I have studied it carefully and found it to be quite objective.
Then, taking this opportunity, I would like to inform you about the work of the People’s Bank of China (PBC) to practice sound monetary policy in a more flexible and appropriate way and implement the requirements of the government work report on securing market entities in the fight against the COVID-19 pandemic since the start of this year.
First, by taking advantage of quantitative monetary policy tools, we have broadened the aggregate supply by focusing on alleviating financing difficulties.
In the first half of 2020, with regard to monetary policy, we deployed a set of strong support measures, including three rounds of reductions in the reserve requirement ratio (RRR), additional quotas of RMB 1.8 trillion for central bank loans and central bank discounts, a program to support credit-based loans to micro and small enterprises (MSBs), and the phased deferral of repayment of principal and interest on loans for micro, small and medium-sized enterprises (MSME).
These measures have yielded solid results. At the end of May, the growth rates of broad money (M2) and aggregate financing of the real economy (AFRE) reached 11.1% and 12.5% respectively, both remarkably higher than those of the last year. The stock market, bond market, foreign exchange market and RMB exchange rate were broadly stable. Since the second quarter of 2020, China’s main macroeconomic indicators have shown favorable signs of recovery.
In the second half of 2020, we will continue to maintain adequate liquidity at a reasonable level through monetary policies, which is expected to lead to RMB lending expansion of nearly RMB 20 trillion and AFRE growth of over 30,000 billion RMB throughout the year.
Second, by advancing the reform of market-based interest rates, we have guided a continued decline in market rates and encouraged the financial sector to reasonably reduce profits to support businesses, with the aim of mitigating costs. high funding.
Since the start of 2020, the financial sector has demarcated its profits to support businesses in three ways, namely lowering interest rates, adopting monetary policy tools that can directly support the real economy, and the reduction of bank charges. It is estimated that with these measures, the financial system will reduce profits by 1.5 trillion RMB to support enterprises throughout the year.
Third, by strengthening write-offs and ceding of non-performing bank loans (NPLs), we have sought to address the sustainability issue of supporting the financial sector to the real economy. Under the impact of the pandemic, bank NPLs will increase slightly. In this sense, strengthening the disposal of non-performing assets is crucial to strengthen the sustainability of banks’ support to the real economy. It is also an important aspect of the financial sector to bear the costs of the real economy, which is seen as the contribution of the financial sector to the real economy.
We believe that financial support policies in response to COVID-19 are progressive policies. Therefore, when it comes to policy design, the focus should be on the compatibility of incentives and the prevention of moral hazard. We need to pay attention to the “legacy” of policies, keep aggregates at appropriate levels, and consider in advance the reasonable timeline for the release of policy tools.
Fourth, we have achieved effective money and credit growth while keeping the PBC’s balance sheet virtually stable. The PBC has lowered the RRR ten times since 2018, freeing up about RMB 8 trillion in cash and reducing the average RRR from 15% to 9% currently. A reduced RRR will accordingly increase the commercial bank money available to them and thus increase the money multiplier. The process of reducing the RRR, on the one hand, resulted in the contraction of the balance sheet of the PBC. On the other hand, this was reflected in the effect of monetary expansion, as commercial banks could issue more loans. In the meantime, however, the PBC “has broadened its balance sheet” by increasing the scale of central bank lending, the central bank discount, and adopting other monetary policy instruments. Both RRR cuts and increased central bank lending are expansionary monetary policy tools, but when reflected in the PBC’s balance sheet, the former leads to a contraction of the balance sheet while the latter leads to a contraction. expansion of the balance sheet. In recent years, the values of the PBC’s balance sheet shrinkage and expansion have been basically equivalent. As a result, the size of the balance sheet has remained virtually stable at around 36 trillion RMB. This mechanism differs from those of the major world economies, whose central banks have considerably enlarged the size of their balance sheets. However, commercial banks in China have been building up their balance sheets on a continuous and reasonable basis, with loans growing relatively quickly. This demonstrates the improvement in the efficiency of the transmission of monetary policy and the proper functioning of the market mechanism.