Financial Work Conference Sets Tone for Reforms Over Next Five Years

PRC premier Wen Jiabao concluded the two-day National Financial Work Conference in Beijing on January 7, in which he stressed reforming the financial sector over the next five years. The plans include strengthening systematic risk management in the financial sector and encouraging financial support for China's economic restructuring. Premier Wen’s speech reflected the policy priorities of China’s financial leadership, and it was in line with specific remarks from the heads of each of China’s four major financial regulatory agencies.

China’s financial leadership hosts the national financial work conference every five years to set priorities for financial reform for the next five years. Each of the four major agencies—China Banking Regulation Commission (CBRC), China Insurance Regulation Commission (CIRC), China Securities Regulation Commission (CSRC), and the People’s Bank of China (PBOC)—also held separate annual conferences immediately after the conclusion of the financial conference, launching specific policies to implement overall reform priorities.

At the meeting, new CIRC Chair Xiang Junbo laid out reform and policy priorities for 2012 at a national insurance regulation work conference on January 7 as follows:
• Improving the market access and exit mechanisms to restructure the insurance industry;
• Solving issues involving auto insurance claims and life insurance sales; and
• Developing preferential tax policies to promote personal tax-deferred pension insurance pilot projects, and the development of catastrophe insurance and agricultural insurance.

According to Xiang, several regulatory documents, such as the Guidelines for Motor Vehicle Insurance Claims Management and Operational Rules for Life Insurance Operations, are expected to be implemented in 2012 to better regulate the market. (Opening the market for mandatory third-party auto liability insurance was a significant outcome of the May 2012 Strategic and Economic Dialogue (S&ED) that has not yet been implemented.)

Foreign insurance companies that have had successful experiences in other developed markets may be able to expand their operations in China under improved market access through the aforementioned regulatory developments. Foreign companies may also be able to leverage their experiences in other global markets to cooperate with some Chinese insurance companies that seek to provide these new types of services.

Stock market reforms
CSRC Chair Guo Shuqing said at the 2012 national securities and bonds supervision work conference on January 9 that the agency plans to enforce a stricter monitoring system for initial public offerings (IPOs) and reform the administrative approval system to access the stock market. According to Guo, substantial measures must be taken to address the overpricing of IPOs and speculation on the shares of poorly performing companies. Reforms must be made to enable the stock market to adapt naturally to demand. Companies listed on the stock market are expected to face increasingly intense scrutiny now that the investor protection bureau has been established to protect individual investors’ interests. Guo also confirmed that China will accelerate the pace to introduce more Qualified Foreign Institutional Investor (QFII) plans and increase the amount of investment; expand the scale and investment quota of the RMB Qualified Foreign Institutional Investor (RQFII) pilot projects in 2012; and launch the two-way cross-border Exchange-Traded Fund (ETF) in a timely manner.

Support for small enterprises, strategic industries
The PBOC Governor Zhou Xiaochuan signaled that it will continue to monitor liquidity, but that it does not plan to stimulate the economy as much as it has the last few years, when the government injected RMB 4 trillion (1 billion) into the economy. CBRC Chair Shang Fulin stated that CBRC will closely monitor potential credit and liquidity risks while encouraging financial institutions to provide more innovative and targeted financial services for small- and medium-sized enterprises and strategic emerging industries. CBRC will also promote the implementation of increased market access, debt-to-savings ratio assessment, and capital measurement. Specifically, banks are called to increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies, and reduce the cost of securing credit. Foreign companies with advanced technologies such as energy-saving chemicals, high-tech equipment, and highly-developed management and operation models for modern services and cultural industries will also enjoy better access to credit.

More financial support to the economy
CBRC’s preferential loaning policies reflect Premier Wen’s pledge to improve companies’ access to financial resources, and improve support of financial institutions to restructure China’s economy, save energy and reduce emissions, and encourage indigenous innovation. Wen also promised to open up China’s financial sector for foreign investors and financial institutions. In his speech, Wen addressed foreign investors’ concerns by pledging to:

• Further open up the market to attract more private and foreign investment in the financial service sectors;
• Push forward renminbi capital account convertibility and interest rate liberalization;
• Increase Hong Kong and Shanghai’s development into international financial centers;
• Standardize the development of credit rating agencies;
• Reform Chinese financial institutions, especially in the realm of corporate governance, effective decision making, and incentives systems; and
• Transform the China Development Bank into a commercial bank.

In addition, Wen laid out the PRC government’s strategy to manage risk, encouraging efforts to:

• Set up a unified and prudent risk-monitoring regime for the banking system to prevent systematic risk;
• Improve coordination among financial regulatory agencies;
• Improve the management of state-owned assets; and
• Take into account the revenue and spending of LGFVs (local government financial vehicles) into the central government's budget management, and establish a risk management system for local government debt.

Looking ahead
This financial conference is widely seen as an event that sets the tone for financial reform for the next five years. Each of the last three conferences (held in 1997, 2002, and 2007) has brought major breakthroughs toward reforming China’s financial agencies. For instance, during the 2007 national financial work conference, leaders announced reforms to China’s policy banks, improved management of foreign exchange reserves, and accelerated expansion of China’s bond market.
However, Premier Wen’s remarks at this year’s conference implied no major changes in how the Chinese government approaches financial reform, as financial stability and risk management remains at the top of the agenda.

he US-China Business Council continues to push to address financial services issues in China, including promoting further market access to increasingly diverse financial services for US services firms in the insurance and banking sectors and removing ownership restrictions for US firms. USCBC will continue to advocate for US firms in the upcoming Investment Forum, S&ED, and other bilateral dialogues.