Su Ning: Improve financial ecological environment, promote financial
innovation, boost financial development
Speech by Mr Su Ning, Deputy Governor of the People's Bank of China, at the First China Financial
Forum, Shanghai, 3 November 2005.
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Honorable guests,
It is my pleasure to attend the Financial Ecological Environment Forum co-sponsored by the China
Society for Finance and Banking and the Financial News. Based on their local practices, several
Mayors and Governors have just elaborated on the significance of improving financial ecological
environment in terms of promoting harmonious financial and social development. Improvement of
financial ecological environment holds great importance not only to financial stability, but also to
financial innovation and development. I would like to take this opportunity to share with you my
observations on the relationship among improving financial ecological environment, promoting
financial innovation and boosting financial development.
With huge increase of financial assets and more diversified financial institutions, on one hand, China's
financial industry developed rapidly since opening-up and reform. On the other hand, the overall
financial development is still at low level and lack of competition. We have the highest saving ratio
globally, but we have not fully and rationally utilized those savings, particularly, we have rather
unsatisfied financial structure that cannot meet the investment and financing needs of multi-layer
economic agencies, with the banking sector taking a dominate position over other financial sectors,
low proportion of direct finance and limited breadth and depth of financial market. Furthermore, due to
the simplified financing structure and lack of financial instruments, financial risks were concentrated
excessively and financial stability is under threat as well. The situation roots from not only China's
current economic and financial development stage, but also from some fundamental conditions,
especially financial ecological environment conditions. As a result, the improvement of financial
ecological environment plays an important role in encouraging financial innovation and creating a
favorable external environment for the financial industry.
1. An improved legal environment. An ideal legal environment can promote financial innovation.
Basic legal rights, like property right and creditor's right, could provide clear definition and
sufficient protection in the process of financial innovation. Take the Enterprises Insolvency
Law as an example. It was stipulated mainly to deal with state-owned enterprises' insolvency
more than 20 years ago. Currently, many state-owned enterprises have been transformed
into companies with different ownership structures, thus we need a standard Enterprises
Insolvency Law consistent with the socialist market economy. A good Enterprises Insolvency
Law will define and protect the rights of shareholders and creditors when firms go into
insolvency process. Corporate bonds issuance and other financial innovations will enjoy a
secure environment too. The Company Law and Securities Law currently either have many
constrains on or unclear definition of private placement and OTC market, affecting the
establishment and development of multi-layer capital markets. Some of the shortcomings
have been amended in the recent revised version of the two laws. Besides, the Guarantee
Law and the Property Right Law could affect the effectiveness of guarantee, pledge, and
property rights applications in financial innovation if they have unclear definition of secured
interests and property rights. There are many other similar cases that show the importance
of such basic laws to financial ecological environment improvement as well as to financial
innovation and development.
2. An orderly institutional environment. China is still in the transitional period to establish and
improve socialist market economy, during which, how to clarify the relationships among
government, market and enterprises, especially the administrative scope and ways of
government, exerts great impact on financial innovation and development. On one hand,
compared with the developed countries, China's governmental administration covers a much
wider scope and has strong influence, which could promote financial innovation and
development significantly if well organized. On the other hand, if the functions of the strong
government are not properly fulfilled, it could also impede the improvement of financial
ecological environment. For instance, currently, excessive administrative approval, unclear
approval standards and undefined accountabilities still exist in the financial industry.
Reflecting China's financial innovation process in 1980's to mid-1990's in the 20th century,
China once detoured in financial products innovation, experienced some financial risks and
even tried to mitigate these risks by strengthening administrative control, because of the
underdevelopment of qualified personnel, technology and management skills. It was
unavoidable in a certain period of time, but, with the improvement of the market economy,
we need to encourage and regulate financial innovation by making more use of market tools.
3. A good credit environment. A credit environment weighs much on financial ecological
environment. In terms of credit information, financial innovation is a process in which credit
information is collected and managed with various financial instruments to avoid risks and
get returns. Sound credit information system, true and effective information disclosure, real
default accountabilities are fundamental factors to the success of financial innovation. At
present, China's social credit system is still under construction and far from able to meet the
needs of socialist market economy development. The development of the social credit
registration system and credit reference agencies is still in its infant stage, credit information
of firms and individuals are not effectively collected and accurately assessed and financial
institutions cannot make accurate business decisions based on credit information provided
by the clients. Effective penalty mechanism for credit slippage has not been established and
all relevant parties in the society are yet to clarify and build consensus on the basic concept,
function and development orientation of the social credit system. Rules and regulations
concerned with credit registration are rather lagging behind, in particular, there is no clear
distinction between reasonable credit information collection and protection of individual
privacy and commercial secrets. In such an environment, financial innovation will be
inevitably suppressed.
4. An excellent environment of intermediary services. Intermediaries will affect financial
innovation in the sense whether they could timely and accurately expose the value and risks
of financial products to the investors. With the socialist market economy gradually improved,
markets will increasingly strengthen its basic role in resource allocation. Accordingly,
financial innovation will be gradually transferred from relying on administrative approval to
market discipline based on standard information disclosure and credit rating, which set
higher requirements on intermediary services, such as on payment and settlement, credit
rating, accounting and legal advice etc. Frankly speaking, compared with international
standards, China still has a long way to go not only in improving its accounting, auditing and
rating standards, but also in providing the related intermediary service and fostering code of
conducts and business integrity. Strengthening infrastructure and improving intermediary
services, particularly integrity of the intermediaries, become an urgent task to improve
financial ecological environment.
I listed the above basic conditions for financial innovation from the perspective of financial ecological
environment. To cultivate those conditions, we need to further push changes in mindset, institutions
and operating mechanisms. Therefore, we should further improve financial ecological environment
associated with institution building, law enforcement, credit system and intermediary services so as to
create a favorable platform for financial innovation.
First, establishing a market-driven financial innovation system. Basically speaking, financial innovation
originates from the intrinsic needs of economic and financial market development. Governments at
different levels and financial regulatory authorities could only play positive roles by improving legal
system and relevant mechanisms and maintaining market orders. Take the corporate bond as an
example. Corporate bond is a matured financial product in market economies and a direct financing
tool that market players bear relevant risks themselves; therefore, we can adopt more market-oriented
strategy and measures to foster its development. In line with the principle of openness, fairness and
equality, we should gradually create conditions for market-oriented corporate bond issuance by
regulating information disclosure, cultivating qualified institutional investors and strengthening market
infrastructure building-up. Once institutional investors are developed, information disclosure and
intermediary services are improved and the trading platform as well as payment & settlement system
are enhanced, investors could more efficiently manage financial risks by making use of the market,
more corporations could have opportunities to issue bonds and market innovation could be developed
further. In the future, we should improve market infrastructure and create a good and market-friendly
institutional environment to develop internationally matured financial products, particularly those
products targeted institutional investors.
Second, improving legal system protecting financial innovation. Improving financial legal system lays
the foundation for the establishment of financial ecological environment and the encouragement of
financial innovation. We should improve the Enterprises Insolvency Law and the Guarantee Law that
are relevant to financial credit protection. With regard to improving the Enterprises Insolvency Law, it
should become the last resort for lenders to protect their rights. The legal status of creditors in the
process of enterprises bankruptcy and restructuring should be strengthened, particularly creditors
should be endowed with the right to apply for entering into liquidation of the debtors. With regard to
improving the Guarantee Law, secured creditors' priority in debt repayment should be strengthened so
that the securities could become the effective protection to avoid relevant risks. Movables, especially
enterprises' account receivables and inventories, should be incuted in guaranty and mortgage and the
role of guarantee and security should be adequately fulfilled in financial innovation, in particular,
supporting the small & medium-sized enterprises' financing. As to improving the Company Law and
the Securities Law, market entry threshold for stock companies should be lowered to lay a good
foundation for the development of private placement and OTC market and to make enough room for
the establishment of multi-layer capital markets. As to improving the Patent Law, the intellectual
property right of financial products innovation should be protected in the form of registered patents. At
the same time, law enforcement environment should be improved to remove administrative
interference.
Third, improving credit environment to promote financial innovation. Credit environment is the key
factor to financial innovation and stability. For example, informal financing exists in various parts of
China, but with great regional differences in terms of the business size. Coastal areas, like Zhejiang
province, are homes to not only very active informal financing, but also to many financial innovations
in supporting small & medium-sized enterprises' credit needs and the risks are generally under good
control. But in other parts of China, informal financing is very risky, and it even falls into disguise for
intentions cheating. The reason behind such phenomena is the different credit environment in different
regions. Economic development in Zhejiang is based on private enterprises, full market competition
and completed transformation of governmental function, which hold great significance to the cultivation
of credit culture. With regard to improving social credit system, the focus should be placed on the
establishment of enterprise and individual credit registration system by accelerating legislation of
credit registration laws and regulations so as to set up a regulated credit registration market. The
establishment of credit registration system and market cultivation should be accelerated via unified
planning and staged implementation; collection of basic credit information should be properly
centralized to avoid duplicated system construction and information segregation; value-added credit
reference services, such as credit rating and appraisal, should be fostered in principle of diversity and
fair play. The core technics and business standards in credit registration should be unified to promote
information sharing. Credit registration market supervision system should be established which
combines regulation by the respective authorities and self-discipline by the industry.
Fourth, improving fundamental services for financial innovation. In order to establish the
marketoriented financial innovation system, intermediaries, like these engaging in payment & settlement,
accounting, auditing and legal services should be allowed to play adequate role. First, the
establishment of payment & settlement system should be strengthened, and the basic services,
including registration, custody, trading and settlement should be improved to facilitate financial
transactions and promote enterprises' financial management and information transparency. Second,
international accounting and law standards should be studied and learned so as to create a foundation
for learning from international practice in financial innovation and improving risk prevention of the
financial institutions. Third, building of the intermediary services system should be promoted by taking
legal, institutional and market-based measures to enhance service quality.
In November 2006, the transitional period of China's WTO accession will come to an end. More and
more foreign financial institutions' joining will not only bring advanced financial products and
management skills, but also promote China's financial innovation.
The just concluded 5th Plenum of the 16th CPC Central Committee has adopted the 11th Five-Year
Program which focuses on the next five-year development by taking a scientific approach to economic
development. I believe, with further transformation of China's economic growth model and the gradual
improvement of the socialist market economy, a financial ecological environment that facilitates
financial innovation, development and stability will be built up. As the central bank, we are ready to
make efforts with other social sectors to transform function, improve rule by law, maintain credit order
and improve services to create a favorable financial ecological environment for financial innovation
and development.