Build China into a Financial Powerhouse

Build China into a Financial Powerhouse*

January 16, 2024

I

Since the 18th CPC National Congress in 2012, we have actively explored the laws of financial development in the new era. With a deeper understanding of the essence of China’s socialist finance and constant practical, theoretical and institutional innovations in the financial sector, we have accumulated valuable experience and pioneered a path of financial development with Chinese characteristics.

First, we must uphold the CPC Central Committee’s centralized, unified leadership over the financial sector. The Party’s leadership is essential to financial development with Chinese characteristics. It represents the greatest political and institutional strengths of China’s financial governance. Our major achievements in the financial sector have all been made under the Party’s leadership. The root cause of many problems in our financial system lies in ineffective implementation of the CPC Central Committee’s decisions and plans by some financial institutions. They have slackened their efforts in upholding the Party’s leadership, reinforcing the Party’s political foundations, improving Party conduct, and maintaining integrity. To keep our financial work on the right track, therefore, we must uphold the centralized, unified leadership of the Party Central Committee over the financial sector and leverage the Party’s core role in exercising overall leadership and coordinating all efforts in every related field.

Second, we must adhere to the people-centered philosophy. Our Party-led financial endeavors are designed to benefit the people, which is essentially different from the situation in countries where finance serves capital and a minority of rich people. On our new journey in the new era, financial work must focus on serving the people, providing them with more diverse, inclusive and accessible services, and better protecting the rights and interests of financial consumers.

Third, we should pursue the fundamental goal of the financial sector, which is to serve the real economy. The real economy is the foundation of finance; finance is the lifeblood of the real economy. Serving the real economy is the duty and mission of finance. If we blindly pursue internal circulation and isolated expansion of the financial sector, it will lose its purpose and ultimately lead to crises. China’s financial sector must perform its primary duty of serving the real economy and facilitating high-quality development. It must never sideline the real economy in favor of the virtual economy.

Fourth, we should always prioritize risk prevention and control in financial work. Finance has the functions of managing and dispersing risks, while itself being a carrier of risks. As China’s financial sector grows more massive and complex, the risks it carries have also become much more systemic and interlinked. Accordingly, we must increase our awareness of potential problems, better prevent and control risks, and make our financial system more resilient.

Fifth, we should promote innovation-driven financial development following a market-oriented and law-based approach. Financial security relies on institutional safeguards, financial vitality lies in the market, and financial order is sustained by the rule of law. Financial transactions involve diverse and complex relations between rights and obligations. Characterized by information asymmetry, they require high creditability and so must be placed under a full-fledged regulatory system. To ensure the sound operation of the financial market, it is essential to establish robust systems of financial laws and market regulations. We must be resolute in strictly enforcing these laws and regulations, making certain that any violations are met with uncompromising punishment.

Sixth, we should extend supply-side structural reform in the financial sector. An important feature and strength of China’s financial system is that state-owned financial institutions play a dominant role. However, there are problems such as a relatively high proportion of indirect financing and debt financing, and insufficient inclusiveness in financial services. In addition, there are also issues like over-financialization, unregulated financial ventures, and a proliferation of illicit financial activities. Targeting these problems, we should drive supply-side structural reform to a deeper level, and clarify the relationships between indirect and direct financing and between equity and debt financing. We should also optimize the structure of the financial system, improve financial infrastructure, and raise the quality and efficiency of financial services.

Seventh, we should strike a balance between opening up and security in the financial sector. National financial and economic security is the precondition for financial opening up. We should guard against the risks entailed in opening up as well as those contrived by competitors. We should also control the pace and intensity of financial opening up and improve the relevant regulatory capacity, to guarantee greater financial openness through better risk prevention and control.

Eighth, we should follow the general principle of pursuing progress while ensuring stability. We should advance financial initiatives in a steady manner, ensure stability through progress, and establish the new before dissolving the old. A steady approach guides all our efforts in macro control and in financial development, reform, regulation, and risk response. We should be cautious in tightening and easing financial policies, in order to prevent abrupt fluctuations. At the same time, we should proactively establish necessary mechanisms, resolve problems when they occur, and continue to make progress, while keeping the overall situation under control. We should maintain a prudent monetary policy and flexibly leverage diverse policy tools, to promote steady and sound macroeconomic development.

The above eight guidelines specify how we should view and carry out financial work on our new journey in the new era. They form an indivisible whole that embodies the basic standpoints, perspectives and approaches concerning financial development with Chinese characteristics. China’s path of financial development follows the objective laws of modern finance. More importantly, it is in line with our country’s actual conditions and is fundamentally different from the Western financial model. We should have firm confidence that this path will become broader through continual exploration and improvement.

II

At the Central Conference on Financial Work last year, I proposed the goal of building China into a financial powerhouse. What does this mean? A financial powerhouse must have solid economic foundations, a leading global position in economic strength, scientific and technological strength, composite national strength, and a range of core financial factors in key areas.

First, it must have a strong currency, which is widely used in international trade and investment and the foreign exchange market, and serves as an international reserve currency. Second, it must have a strong central bank, which is capable of executing monetary policy regulation, undertaking macroprudential management, and preventing and defusing systemic risks quickly and efficiently. Third, it must have well-functioning financial institutions that are highly efficient and risk resistant, cover a full range of businesses, and have a global business layout and an international competitive edge. Fourth, it must have influential international financial centers to attract global investors and have a voice in international pricing. Fifth, it must have a strong financial regulatory capacity, a robust system for the law-based governance of finance, and a powerful voice and significant influence in shaping international financial rules. Sixth, it must have a competent pool of financial talent.

Today, China is already a financial power in terms of scale, with the world’s largest banking industry and foreign exchange reserves, the second largest bond and stock markets, and an insurance industry that is among the largest. On the whole, however, our financial sector is large rather than strong. Building our country into a financial powerhouse requires long-term and sustained effort.

To realize this goal, we must move faster in developing a modern financial system with Chinese characteristics that consists of the following:

First, a sound and stable financial regulatory system. We should build a modern central banking system, optimize the modern monetary policy framework with Chinese characteristics, improve the mechanisms for monetary base control and money supply regulation, and better leverage the functions of monetary and credit policy tools in total volume control and structural adjustment. All these efforts aim to ensure the stable currency value of the Renminbi, and economic and financial stability.

Second, a well-structured financial market system. We should move faster to build a safe, standardized, transparent, open, vigorous and resilient capital market. We should develop a multilayered equity market, improve the quality of listed companies, and reinforce the mechanism for regular delisting. We should encourage startup investing and private equity investing to empower scientific and technological innovation, and strengthen the functions of the bond, currency, and foreign exchange markets.

Third, a system of financial institutions characterized by clearly delineated responsibilities and effective collaboration. China has a full range of financial institutions, and the key lies in allowing them to pursue distinct yet complementary development and to serve the real economy by fulfilling their respective functions and utilizing their different expertise. Financial institutions of all types should pursue their fundamental goals and improve their competitive edge and service capacity, to meet the multilayered and diverse financial demands of the real economy and the people.

Fourth, a complete and effective financial regulatory system. We should strengthen comprehensive, penetrating and constant financial regulation, and enforce supervision of institutions, conduct and functions. Concrete actions should be taken to make our financial regulation more proactive, targeted, synergized and effective. This regulation is essential to establishing a security network for the financial sector.

Fifth, a system of diverse and specialized financial products and services. We should provide premium financial services to support major strategies and key areas, and to bolster weak links. We should improve our performance in five areas: sci-tech finance, green finance, inclusive finance, pension finance, and digital finance. We should accelerate digital and smart transformation of the financial sector.

Sixth, a financial infrastructure system that is self-supporting, controllable, safe and efficient. We should strengthen overall planning, better define market access, regulatory standards, and operational qualifications, increase self-reliance in key financial infrastructure, and improve the safety and reliability of both hardware and software.

III

To promote high-quality development in the financial sector and build China into a financial powerhouse, we should adhere to both the rule of law and the rule of virtue, carry forward the best of traditional Chinese culture, and foster a financial culture with Chinese characteristics.

First, the financial sector must be a bastion of credibility and integrity, and never cross any red lines. Traditional Chinese culture places immense value on honoring commitments. The financial sector is underpinned by credibility. Its word must be its bond, and it must follow market rules and observe professional ethics. The sector must maintain rigorous accuracy, authenticity and compliance, and allow no tolerance of fraud. An honored debt adds to credibility; an unpaid debt diminishes it. The sector should strengthen professional discipline and impose lifetime bans on serious defaulters.

Second, the financial sector should pursue profit through ethical means, rather than place profit above all else. Traditional Chinese culture holds that “honor belongs to those who prioritize ethics over profit, while disgrace befalls those who place profit above ethics”. Forsaking good for the sake of gold has always been held in disdain by people of virtue. While finance plays both roles as a functional tool and a means to generate profit, the latter must always be subordinate to the former. The financial sector must fulfill its social responsibilities, to form a symbiotic relationship with the economy, society, and the eco-environment.

Third, the financial sector should take a steady and prudent approach, rather than seek quick gains. Traditional Chinese culture holds that “haste makes waste and obsession with minor gains jeopardizes greater success”. Some of the world’s most successful financial institutions have thrived to this day because they operate with prudence. The financial sector should develop a solid outlook on operation, performance and risk. Prudent operation attends to both near-term gains and, more importantly, long-term benefits. It should resist the lure of short-term windfalls, avoid reckless expansion, and refrain from taking excessive risks beyond its capacity.

Fourth, the financial sector should uphold fundamental principles while breaking new ground, and avoid sidelining the real economy in favor of the virtual one. The sector faces two key questions — who does it serve, and what is the purpose of innovation? Innovation should aim to better serve the real economy and bring greater convenience to people’s lives. Any initiatives that work against this purpose in the name of innovation must be prohibited.

Fifth, the financial sector must comply with laws and regulations, and refrain from unlawful practices. The sound operation of the financial sector relies heavily on legal and regulatory compliance. Financial institutions and professionals must abide by the law and regulations, respect regulatory standards, and operate within the scope of regulatory approval. They should not seek profit by exploiting legal or institutional loopholes and circumventing regulation, and must not cross any red lines or break the law.

* Excerpts from the speech at a study session on high-quality development of the financial sector, attended by principal officials at the provincial and ministerial level.

(Not to be republished for any commercial or other purposes.)