Publication of Program for Reforming China's
Financial Sector by 2015
Eiichi Sekine
Chief Representative, Beijing Representative OfficeNomura Institute of Capital Markets Research

I.

China announces 12th five-year plan for the financial
industry

On 17 September 2012, China's State Council (cabinet) announced its 12th FiveYear Plan for the Development and Reform of the Financial Industry. The Plan wasdevised by five financial regulators: the People's Bank of China, the China Banking
Regulatory Commission (CBRC), the China Securities Regulatory Commission(CSRC), the China Insurance Regulatory Commission (CIRC), and the State
Administration of Foreign Exchange (SAFE), and is divided into nine chapters.
Specifically, it reviews the 11th five-year plan for the financial industry andprovides seven core guidelines reflecting the opportunities and challenges faced by
China's financial industry during the five-year period (2011-2015) covered by the 12th
five-year plan: (1) establishing controls of the financial industry, (2) optimizing rules
for financial institutions, (3) building diverse financial markets, (4) deepening
financial reforms, (5) promoting reform and opening of the financial industry, (6)maintaining the stability and safety of the financial industry, and (7) strengthening theinfrastructure for the financial industry. Lastly, it seeks to guarantee the mechanisms
to achieve these aims (Figure 1).
In this paper, we look at the Plan in detail and consider the opportunities it presents
for foreign financial institutions and investors.

II. Establishing quantitative and qualitative targets
1. Establishing quantitative targets
1) Setting a target for the financial sector's share of GDP
The Plan includes two numerical targets to be achieved by 2015.
The first is for the financial sector's share of GDP to be raised to around 5% during
the period covered by the Plan.

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Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4

Figure 1: Composition of 12th five-year plan for development
and reform of the financial sector
Preamble
Chapter 1

Chapter 6

Section 3

Accelerating the reform and opening of the financial
sector and promoting change in China's growth model
Main achievements from financial reform anddevelopment under the 11th Five-year Plan
Opportunities and challenges under the 12th Five-year
plan
Guidelines

Section 4

Main objectives

Section 5

Policy focal points

Section 1
Section 2

Chapter 2

Section 1
Section 2
Section 3

Strengthening financial cooperation between Mainland
China and Hong Kong, Macau and Taiwan
Section 4 Enhancing international and regional financial
cooperation
Column 3 Cross-border trade and investment settled in yuan
Chapter 7

Section 2

Improving macro controls and promoting stable andsound economic development
Establishing a robust macroprudential policy framework
for the financial sector
Enhance systems for controlling monetary policy

Section 3

Section 3

Expand financial support to under-served sectors

Section 4

Section 1

Further opening the financial sector on a win-win basis
Making the financial sector more open to overseas
participation
Gradually expanding the yuan's cross-border use

Section 1
Section 2

Section 4

Further strengthening of macro-economic policy
Section 5
coordination
Column 1 Macroprudential policy framework for the financial
Section 6
sector
Chapter 3
Optimize income distribution and build modern financial
Column 4organizations
Section 1 Improving the banking industry's organizational
Chapter 8
structures
Section 2 Promote the rules-based development of the securities
Section 1
industry
Section 3 Encourage innovation in and development of theSection 2
insurance industry
Section 4 Continue proactively and steadily promoting
Section 3
experimentation with universal banking
Chapter 4
Encourage innovation and accelerate the establishment
Section 4
of a multi-layered financial market architecture
Section 1 Focus on improving the stock market
Section 5

Strengthening regulatory oversight for financial stability
and security
Continuing to strengthen financial oversight
Raising the effectiveness of financial regulatory
coordination
Strengthen mechanisms to prevent and provide early
warning of systemic financial risks
Establishing and improving deposit insurance andmarket exit mechanisms for financial institutions
Improving the financial oversight of local governments
Guiding and regulating the sound development ofprivate lending
Deposit insurance
Strengthening foundations and optimizing theenvironment for development of the financial sector
Continue with and enhance improvements in thefinancial sector's legal framework
Strengthen payments systems, social credit
mechanisms, and anti-money laundering programs
Improve accounting standards and data collection in thefinancial sector
Improve the leverage of IT in the financial sector
Strengthening protections of financial consumers

Section 2

Proactively developing the bond market

Section 6

Raising the level of research in the financial field

Section 3

Continue to develop money, foreign exchange, and gold
markets
Proactively nurturing the insurance market

Section 7

Developing pools of financial industry professionals

Section 8

Promoting the establishment of industry self-regulatoryorganizations
Improving mechanisms for assuring plan
implementation
Organizing and strengthening direction of plan
implementation
Enhancing harmonization and integration with otherplans
Establishing and improving mechanisms for evaluating
the plan
Indicators of financial sector development during the12th Five-year Plan and their explanation

Section 4
Section 5

Promoting development of the futures and financial
derivatives markets
Column 2 Instruments to mitigate credit risk in the interbank
marketChapter 5
Reforming and continuously improving financial
operational mechanisms
Section 1 Gradually implement market reforms for (deregulate)interest rates
Section 2 Improve mechanisms for forming yuan exchange rates
Section 3
Section 4
Section 5
Section 6

Note:
Source:Chapter 9
Section 1
Section 2
Section 3
Annex

Gradually achieving convertibility of the yuan in capital
accounts
Further improving the management of foreign currency
reserves
Continuing reform of financial institutions
Encouraging and guiding the participation of privatesector capital in the service industry

Published on 17 September 2012.
Nomura Institute of Capital Markets Research, based on data from the People's Bank of China

Publication of Program for Reforming China's Financial Sector by 20152

That share of China's GDP was 4.46% from 1990 until 2000 and 4.42% from 2001
until 2010. In setting these targets for the financial sector's share of GDP, China
referenced its own calculations for those shares in the US (3.22% in the 1950s, 5.59%
in the 1980s, and 8.01% in the 2000s) and Japan (5.79% in the 1980s and 6.53% in
the 2000s) at relative stages of their economic development. We note that statistics
from Japan's Cabinet Office show that the financial and insurance sector had a 4.9%
share of Japan's GDP in 2010.
The Chinese government is targeting average annual growth in real GDP of 7%,
and even faster growth for the financial sector, during the period covered by the 12th
five-year plan.

2) Targets for total social financing
Another numerical target is to increase the percentage of total social financing
accounted for by direct financing by nonfinancial corporations to at least 15% by end2015.
Total social financing is a monetary policy indicator established by the People's
Bank of China and refers to the total amount of funding in the real economy within a
specified time period. Total social financing includes yuan-denominated loans, foreign
currency-denominated loans, entrusted loans, loans from trust companies, banker
acceptances, corporate bonds, and domestic stock issued by nonfinancial corporations.
Before the Plan was announced, the government announced the amount of totalsocial financing and the specific breakdown. The amount of total social financing
increased from 2.0112 trillion yuan in 2002 to 12.8286 trillion yuan in 2011 (Figure 2).
Much of this growth came in response to the Chinese government's 4 trillion yuan
stimulus package in 2008, which caused total social financing to nearly double, from6.9802 trillion yuan in 2008 to 13.9104 trillion yuan in 2009.
By category, in 2011 yuan-denominated loans accounted for 58.2% of the total,
foreign currency-denominated loans 4.5%, entrusted loans 10.1 %, loans from trust
companies 1.6%, banker acceptances 8.0%, corporate bonds 10.6%, and domestic
stock issued by nonfinancial corporations 3.4% (Figure 3).Compared with 2002, theshare of yuan-denominated loans declined substantially, while the share of bankbrokered loans, banker acceptances, and bonds increased. It appears that the growth inbonds was helped by the introduction in 2005 of commercial paper (CP) in theinterbank bond market, and the introduction in the same market of medium-term notes(MTN) in 20081.

1

See Eiichi Sekine, Chugoku no Shasai Hakkou Seidou Kaikaku—Chuugokuban MTN no
Toujou (Reform of China's corporate bond issuance market—The advent of Chinese
MTN), Capital Market Quarterly, Spring 2009 issue (in Japanese).

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Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4

Figure 2: Total social financing (2002 to September 2012)(yuan billions)
16,00014,00012,00010,000
8,000
6,000
4,000
2,000
0
-2,000
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012
(year)

Yuan loans

Foreign currency-denominated loans

Entrusted loans
Banker acceptances

Loans from trust companies
Corporate bonds

Domestic stock issued by nonfinancial corporations

Note:
Source:Figures for 2012 are as of September.
Nomura Institute of Capital Markets Research, based on data from the People's
Bank of China

Figure 3: Composition of total social financing (2002 to 2012)(Units: %)Total social financing
Foreigncurrencydenominated
loans

Yuan
loans

Entrusted
loans

Loans from
Bankertrust companies acceptances

Corporatebonds

Domestic stock
issued by
nonfinancial
corporations

2002

100.0

91.9

3.6

0.9

—

-3.5

1.8

2003

100.0

81.1

6.7

1.8

—

5.9

1.5

1.6

2004

100.0

79.2

4.8

10.9

—

-1.0

1.6

2.4

2005

100.0

78.5

4.7

6.5

—

0.1

6.7

1.1

2006

100.0

73.8

3.4

6.3

1.9

3.5

5.4

3.6

2007

100.0

60.9

6.5

5.7

2.9

11.2

3.8

7.3

2008

100.0

70.3

2.8

6.1

4.5

1.5

7.9

4.8

2009

100.0

69.0

6.7

4.9

3.1

3.3

8.9

2.4

2010

100.0

56.7

3.5

6.2

2.8

16.7

7.9

4.1

2011

100.0

58.2

4.5

10.1

1.6

8.0

10.6

3.4

2012

100.0

57.3

4.6

7.3

6.0

6.5

13.3

1.9

Note:
Source:3.1

Figures for 2012 are as of September.
Nomura Institute of Capital Markets Research, based on data from the People's
Bank of China

Publication of Program for Reforming China's Financial Sector by 2015

4

The share of direct financing (the total of corporate bonds and stock) averaged
5.03% from 2002 until 2005, when the 10th five-year plan was in effect, and averaged
11.08% from 2006 until 2010, when the 11th five-year plan was in effect. Because
measures to increase the share of direct financing remained in place during the 12th
five-year plan, a direct financing share of at least 15% by end-2015 is posited as anachievable target in that plan.

2. Establishing qualitative targets
1) The main targets set
In addition to the two quantitative targets noted above (total growth and structuraladjustments), the Plan also set qualitative targets, namely, (1) a further strengtheningof the market's fundamental role in distributing financial resources, (2) a further
deepening of the reform of financial institutions, (3) an extension of financial services
to basically cover all sectors, and (4) an enabling of the overall control of financial
risk.

2) Main policy emphasis
The Plan uses the above-noted quantitative and qualitative targets to establish themain policy emphasis. Specifically, the Plan focuses on (1) providing for macrofinancial control, (2) promoting structural economic adjustments, (3) promoting a
trend toward general equilibrium in the balance payments, (4) deepening reforms inthose sectors that are key to finance, (5) promoting financial innovation, (6)leveraging the investment and financing functions of financial markets, (7) improving
the overall risk management capabilities of financial institutions while constantly
improving the efficiency of financial oversight, and (8) strengthening consumer
protection in the finance sector.

III. Opportunities for overseas financial institutions andinvestors
Chapter 6 of the Plan, Further opening the financial sector on a win-win basis,suggests a number of opportunities for overseas financial institutions and investors.
Its policies to open the financial sector to overseas participation include, first of all,a look at integrating its two major agencies dealing with domestic and international,
while adhering to the principle of "prioritizing domestic needs while allowing
competition and cooperation in a gradual, safe and controllable manner toward a winwin result," and also a look at combining inbound and outbound internationalization
to further open the financial sector to overseas. Secondly, it will strictly define thetiming, degree, and pace of this financial opening to the outside to ensure that it is5

Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4

commensurate with China's level of economic development, market sophistication,and financial oversight capabilities.
Next, we examine some key sections of the text in chapter 6 of the Plan. Of these,
the increased cross-border use of the yuan and strengthening of financial cooperation
between the Chinese mainland and Hong Kong should help overseas financial
institutions to increase their offshore yuan services (including bonds, loans, forex, andhedging products).

1. Making the financial sector more open to overseas participation
1) Inbound (from overseas into China)First, referencing international conceptual and empirical rules of advanced
financial administration, set up mechanisms for, then gradually raise the level of, thecorporate governance of China's financial sector.
Second, encourage financial institutions to utilize foreign capital in various ways
and develop deeper cooperative relationships with overseas financial institutions.
Third, make effective use of preferential government loans overseas andinternational commercial loans and set up mechanisms for managing foreign debt.
Fourth, establish mechanisms for the formation of the yuan exchange rate andensure that steps toward the transition to yuan capital account convertibility andexpanded cross-border use of the yuan occurs at the proper pace and in the correct
sequence.
Fifth, further open money markets, capital markets, foreign exchange markets, andthe gold market to overseas participation.

2) Outbound (Chinese firms going global)
First, establish mechanisms relevant to financial institutions going global, guide
financial institutions into adopting global development strategies based on methods
proven by experience to be effective, strengthen the development of professionals
with global skills, and take gradual steps to develop China's large global financial
institutions.
Second, encourage financial institutions to steadily develop international business,raise the international expertise of management, and expedite the development ofinternational financial services conducive to upgrading the level of export products
and helping firms go global.
Third, improve the regulation of the overseas subsidiaries (including branches andbusiness offices) of financial institutions and facilitate the building of financial
institutions' cross-border risk management mechanisms.

Publication of Program for Reforming China's Financial Sector by 20156

2. Gradually expanding the yuan's cross-border use
First, promote the cross-border use of the yuan while adhering to the principles ofmeeting actual needs, allowing the easy transactions first and difficult ones later,
improving oversight, and ensuring the controllability of risks.
Second, promote the following types of cross-border yuan-denominated settlement.
(1) Ensure cross-border, yuan-denominated trade settlement is done properly.
(2) Steadily increase the cross-border, yuan-denominated settlement of foreign
direct investment.
(3) Support domestic banks' use of yuan-denominated lending for overseas
projects.
(4) Encourage the gradual use of cross-border, yuan-denominated settlement by
individuals.
(5) Consider how to build a framework for administering the yuan's external
debits and credits.
(6) Continuously expand channels for overseas institutions' use of yuan funds.
Third, steadily promote the issuance by domestic institutions (residents) of yuandenominated bonds in Hong Kong, while encouraging overseas institutions(nonresidents) to continue issuing yuan-denominated bonds in China. This will
provide support to the relevant countries for holding some of their international
reserves in yuan.
Fourth, improve the mechanisms for collecting data on and monitoring the crossborder and overseas movement of the yuan, and build the mechanisms required forpreventing and managing risk.

3. Strengthening financial cooperation between Mainland China and Hong
Kong, Macau, and Taiwan
1) Financial cooperation with Hong Kong and Macau
First, expedite the building of Shanghai's international financial center, whilestrengthening Shanghai's financial cooperation with Hong Kong.
Second, provide support for developing a financial cooperation region headed byHong Kong's financial system, primarily using financial resources and services from
cities in the Pearl River Delta.
Third, provide support to help Hong Kong become a center for offshore yuantransactions and international asset management, while consolidating and improving
Hong Kong's position as an international financial center.
Fourth, build mechanisms to deepen financial cooperation between Guangdong
province, Hong Kong, and Macau and also strengthen market, institutional,transactional, regulatory, and think-tank cooperation among the three regions.

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Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4

2) Financial cooperation with Taiwan
Strengthen cross-strait (mainland China-Taiwan) financial cooperation, promote
the establishment of a suitable cross-strait currency settlement mechanism, andexpedite the creation of a cross-strait regional financial services center in Xiamen(Amoy).

4. Enhancing international and regional financial cooperation
First, proactively participate in global economic governance, deepen bilateral andmultilateral economic and monetary policy dialogue and cooperation, and enhancemacroeconomic and monetary policy coordination with major economies.
Second, proactively advance reform of the international financial system andpromote rationalization of the international currency regime.
Third, actively participate in the revision and development of financial standards
led by such international organizations as the Financial Stability Board and BaselCommittee on Banking Supervision, and thereby play a greater role in international
economic and financial organizations.
Fourth, deepen multi-lateral financial and monetary cooperation while guiding andpromoting the process of financial cooperation at the regional level.
Fifth, consolidate cooperation with overseas central banks and regulatory
authorities and improve information sharing mechanisms.

IV. The path to domestic financial deregulation
The opening of the finance sector to overseas participation has to be done inconjunction with domestic financial deregulation. Chapter 5, "Reforming andcontinuously improving financial operational mechanisms," first calls for driving
reform in key financial areas and critical process in a market-oriented direction, to
continuously work on perfecting financial operation mechanisms, bring out thevitality of market agents, and give full rein to the market's fundamental role inallocating financial resources. Second, further delineate the boundaries within which
the government has a role while reducing government intervention in financial
activities at the micro level.
Below, we examine specific key sections of the text in Chapter 5 of the Plan. The
gradual achievement of yuan convertibility in the capital account should contribute to
the growth in the inbound investment in Chinese securities by nonresident investors
using the qualified foreign institutional investors (QFII) regime, while improvementin the investment of foreign reserves should lead to an increase in outbound securities

Publication of Program for Reforming China's Financial Sector by 20158

investment from China. In addition, continued reforms of financial institutions should
lead to their providing such investment banking services as IPOs and M&A.

1. Phasing in the market-oriented reform (liberalization) of interest rates1) Basic thinking
Promote the development of a benchmark interest rate system for financial markets
that further reinforces the benchmark role of the Shanghai interbank offered rate
(SHIBOR), including by expanding its use with market-based rate products.

2) Method of moving toward market-based interest rates
First, improve the medium- and long-term market yield curves so as to provide aneffective benchmark for financial institutions to price product.
Second, interest rates can be made more market based as conditions mature,through such methods as eliminating regulations on the pricing of alternative financial
products.
Third, continue to improve central bank systems for regulating interest rates andfacilitate interest rate transmission channels. Based on the above, guide financial
institutions to continuously strengthen their ability to measure risk, and establish aself-regulating mechanism for pricing interest rates based on SHIBOR. At the sametime, steadily pursue market-based reform of interest rates in accordance with theprinciples of easing the ceiling and floor requirements for the benchmark rate, letting
the market form the benchmark rate, and propagating an impact on central bankmarket operations.

2. Improving mechanisms for forming yuan exchange rates1) Basic thinking
In accordance with the principles of subjectivity, controllability, and gradualness,steadily reform the mechanism for forming the yuan's exchange rate.

2) Approach to exchange rate reform
First, improve the market-based managed floating exchange rate regime thatcurrently operates with reference to a basket of currencies, make changes in the yuan
exchange rate more flexible in both directions, and ensure the basic stability of theyuan exchange rate at a reasonable equilibrium.
Second, develop the foreign exchange market in a coordinated manner while
increasing the number of tools available to manage exchange rate risk.

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Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4

Third, conduct further research on establishing a bilateral direct exchangemechanism between the yuan and emerging market currencies, and actively promote
the listing of the yuan's exchange rate with the currencies of emerging market
economies and neighboring countries on the foreign exchange market.

3. Gradually achieving convertibility of the yuan in capital accounts
1) Basic thinking
Further relax the controls on cross-border capital flows in accordance with theoverall principles of emphasizing priorities, making overall progress, adapting to themarket, reducing distortions, exploring proactively, and leaving leeway. At the sametime, improve the systems for balancing capital inflows and outflows and for
managing external debt and debt claims. Through the above, steadily, and in anorderly manner, advance the convertibility of the yuan in capital accounts.

2) Ways to achieve convertibility in capital accounts
First, generally allow for convertibility of direct investment as a way to facilitatethat investment.
Second, further increase the level of convertibility for securities investments, with
an emphasis on opening up domestic capital markets and expanding investment inoverseas securities.
Third, expedite reforms of foreign exchange management for the loan business anddeepen reforms of external debt management systems, with an emphasis on
facilitating cross-border lending, while also regulating the management and oversightof external debts and debt claims.
Fourth, emphasize increasing individuals' discretionary use of foreign currencies
by further relaxing rules on cross-border transactions by individuals under othercapital accounts.

4. Further improving the management of foreign exchange reserves
1) Basic thinking
Proactively explore and develop multi-level channels and ways to use foreignexchange reserves, while improving mechanisms for managing and administering
foreign exchange reserves.

2) Paths toward improvement
First, further research and assess the capacity to bear risks from managing foreignexchange reserves, expand research on the different investment segments, products,

Publication of Program for Reforming China's Financial Sector by 201510

and tools, adhere to long-term, strategic investment principles as well as scientific andeffective investment model criteria, and make steady inroads toward diversified
investing based on prudent assessment. During this process, optimize the allocation ofcurrencies and assets and increase investment returns, with the objectives of keeping
foreign exchange reserves secure, liquid, and profitable.
Second, reform methods of managing foreign exchange reserves so as to supportand harmonize with national development strategies and contribute to the nation's
goal of sustainable development.

5. Continuing reform of financial institutions
1) Large financial institutions and state-owned financial institutionsFirst, continue to deepen the reform of large financial institutions, further improvetheir corporate governance, and clarify the division of responsibility among thegeneral shareholders' meeting, board of directors, board of auditors, and senior
management, while developing effective mechanisms for making and implementing
decisions and providing checks and balances on those decisions.
Second, promote more diverse equity ownership of financial institutions, review
reasonable shareholding levels of financial institutions in which the government is thecontrolling shareholder, and improve the system for administering state-owned
financial assets.
Third, build a mechanism for selecting, recruiting, and placing talent and makeincentives more scientific and rational.

2) Policy banks and financial institutionsFirst, consolidate and deepen commercial reforms of the China Development Bank,
while properly addressing problems with the credit of its bond issues, funding sources,
and regulatory standards.
Second, continue to push forward with reforms at the China Import and Export
Bank, China Agricultural Development Bank, and the China Export Credit InsuranceCo., Ltd., while improving their governance frameworks.
Third, promote the transformation of financial asset management firms into
commercial enterprises.

3) Insurance companies
Improve the corporate governance of insurance companies and continue withreforms toward turning state-owned insurance companies into joint stock companies.
Support the public listing of qualified insurance companies.

11 Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4

V. Conclusion
1. No change in direction of financial sector reforms under new leadership
The process of drafting the 12th five-year plan for developing and reforming thefinancial sector was put together, as well as the Chinese government's overall 12th
five-year plan covering until 2015, began in September 2010, based on surveys,
research, and seminars held by the relevant departments, and while collecting outside
opinions. The financial sector plan reflects work done by the Central Financial Work
Commission, which has been held by the CCP Central Committee and State Council
every five years since 1997, and last met in January 2012.
The year 2012 marked the holding of China's Communist Party Congress, which isdone once every five years, and was also the final year of the Hu Jintao/Wen Jiabao
administration. The 18th National Party Congress that opened on 8 November 2012
named seven new member to the Politburo standing committee, with Xi Jinping at thetop, thus marking the start of the Xi Jinping/Li Keqiang administration. The new
President and Premier were chosen at the National People's Congress held in March
2013, but the new leaders should carry on from the previous administration in
implementing the Five-year Plan that runs to 2015. Accordingly, we expect financial
reforms to follow the path laid out in the 12th five-year plan for development andreform of the financial sector discussed in this paper.
The new administration will keep an eye on progress in implementing the 12th
five-year plan and reflect that in their 13th five-year plan, which will cover from 2016
until 2020.Although we see no risk of a major change in financial sector policy
brought by the change in leadership, it appears fairly certain that the results of theirefforts over the next three years plus will determine the key issues that define the next
set of financial sector reforms.

2. Overseas financial institutions and investors' participation as principals
That being said, however, the Plan includes some fairly difficult reform programs.
Among the different components of domestic financial deregulation, the deregulationof interest rates will impact the profit structure of deposit-taking institutions, and thismakes it necessary to do such deregulation in conjunction with improvements in therules governing the bankruptcy resolution of financial institutions and in deposit
insurance. Irrespective of the political system, such reforms will take time, given theneed to resolve the domestic conflicts of interest. Accordingly, depending on
circumstances there is a possibility that China will not complete these reforms before
the end of the current five-year plan, and thus will have to carry them over to the next
five-year plan that begins in 2016.
In addition, if a supervisory body similar to the State-owned Assets Supervision
and Administration Commission (SASAC), which was established in 2003 to

Publication of Program for Reforming China's Financial Sector by 201512

supervise nonfinancial state-owned enterprises, were to be established to manage
ownership in state-owned financial institutions, it would probably be effective inmanaging the state's ownership of financial assets and exercising its shareholder rights,
but this would inevitably create the need for resolving conflicts of interest between
state-owned financial institutions and the central government, regional governments,
and related agencies.
That being said, the new administration's ability to strike a balance between
opening up the financial sector to overseas participation and deregulating the domestic
financial sector should not only directly help satisfy the demand for funding in
China's real economy, it could also be a deciding factor on whether resources areallocated efficiently enough to change China's growth model to one reliant on
domestic demand instead of external demand. Overseas financial institutions andinvestors will likely play a principal role in the process of writing the next chapter ofthe history China's financial sector reforms.
With China's GDP having now slowed down for a seventh consecutive quarter, to7.4% YoY in July-September 2012 (the figures announced on 18 October 2012), theimmediate challenge is to achieve the goals set out in the State Council's Executive
Meeting held on 17 October, which are to (1) maintain reasonable levels of market
liquidity and new lending volume while making initial adjustments to total social
financing and (2) optimize the lending structure, expand bond issuance volume, andpromote the stable and sound development of capital markets. The true value of the
12th five-year plan for development and reform of the financial sector is already being
questioned.

13 Nomura Journal of Capital Markets Spring 2013 Vol.4 No.4