Xiang Junbo: Pushing forward the construction of a harmonious socialist
society through developing a financial system for the disadvantaged
Speech by Mr Xiang Junbo, Deputy Governor of the People's Bank of China, at the "2006 China
Financial Forum", Beijing, 26 December 2006.
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Distinguished guests, ladies and gentlemen:
I'm very pleased to attend the 2006 China Financial Forum jointly held by China Society for Finance
and Banking and Financial News. This forum takes the theme of "A harmonious society - the social
responsibility of China's financial sector", which is of great significance, because this theme not only
reflects the characteristics of our times, but also aligns itself with the objective of constructing a
socialist harmonious society, highlighting a very practical question facing the financial sector in China,
i.e., what role the financial sector can play and what social responsibilities it should take as the core in
the modern economy. It is fair to say that each of us as financial practitioners, especially those in
leading positions, must take this issue seriously.
Not long ago, I published an article entitled "Push forward the construction of a harmonious socialist
society through developing a financial system for the disadvantaged". Today, I'd like to take this
opportunity to talk about the background against which this concept is put forward, the definition of the
financial system for the disadvantaged, and its key aspects.
1. Background of the concept
As is known to all, in a modern society, finance and the economy are interdependent. Since China's
reform and opening-up, the economy has been growing at a stable and fast pace. While our overall
national strength keeps improving, some deep-rooted problems have emerged and accumulated,
leading to structural imbalances in the economy and society, which is reflected in the uneven
development among regions, between rural and urban areas, and among industrial sectors. One of
the direct outcomes of the "three imbalances" is an emerging and growing group of disadvantaged
regions, sectors and people. The support and involvement of the financial system is one of the
important factors defining the development of this disadvantaged group. The financial sector has
made great endeavors and undertaken some pilot programs in this area, in particular in supporting the
development of the central and western China, the development of agriculture, rural areas and
farmers, reemployment of laid-off workers, poverty reduction initiatives and student loans. We've put
forward theories, carried out trials, and gained experiences, both positive and negative. But in general,
the theories, practice and experiences are driven by isolated events instead of a systematic plan.
There is no theoretical conclusion made from the strategic perspective of constructing a harmonious
socialist society, and no practice under the guidance thereof. Because of the absence of a systematic
financial theory, institutional and policy system to guide and push ahead the construction of a
harmonious society, it is difficult to display the synergy of the entire financial sector in this cause.
In the new century, especially since the 16th CPC National Congress, we have clarified the strategic
importance of building a socialist harmonious society for the socialist society construction drive. In
addition, the just concluded 6th plenary session of the 16th CPC National Congress adopted the
Decisions on Major Issues Concerning the Construction of a Harmonious Socialist Society. As the
center of the modern economy, finance should and is able to play an important role in the construction
of a socialist harmonious society. So far, the financial sector has not fully adapted to the endeavors to
build a harmonious socialist society. We need to make major breakthroughs in financial reform in the
future. One of the major tasks is to conduct theoretical analysis on how to utilize the financial sector to
support the building of a harmonious socialist society, and find a way for the sector to do so.. Since
structural imbalance is a major strain, finance should make its due contribution to solving the structural
imbalances. To be specific, the financial sector should move away from the concept of "favoring the
rich over the poor", and provide, based on the market principle, necessary support to industrial
sectors, regions and groups that are short of funding and lag behind in economic and social
development. This is not only a requirement for the financial sector to support the harmonious
economic development, but also a responsibility. As such, I believe it necessary to put forward the
concept of "developing the financial system for the disadvantaged" to fully display the functions of the
financial sector in the construction of a harmonious socialist society.
2. Definition of the concept
"Finance for the disadvantaged" refers to the financing activities for the underdeveloped areas and
groups. So far in China, it is meant to be the support rendered to the disadvantaged sectors with
agriculture as the primary one, less-developed regions mainly in central and western China, and
disadvantaged groups of farmers and laid-off workers in urban areas. It is fair to say that finance for
the disadvantaged represents a revision to traditional finance that seeks immediate return. Generally
speaking, in countries with immature financial systems, the opportunities are only available to a small
group of the population with certain capital accumulation, while those short of capital accumulation are
deprived of development opportunities, and subsequently of the benefits from economic growth.
However, for a mature financial system with various financial institutions and appropriate institutional
arrangement, it is possible to give financial support to those people or regions lack of capital
accumulation but equipped with productive skills or resources in one way or another, so that they have
opportunities to grow and develop. Therefore, while conforming to the principle of efficiency in the
market economy, finance allocates resources to backward regions and industrial sectors, and helps
improve the welfare of disadvantaged groups, make them benefit from economic growth and promote
a harmonious society.
Internationally, there are two types of financial support to disadvantaged industrial sectors, people and
regions, namely direct government involvement and indirect policy guidance by the government. Direct
government involvement means that the government establishes policy financial institutions to lend to
disadvantaged industrial sectors and regions, while policy guidance means that the government
adopts preferential policies to guide the market to increase input to the disadvantaged. Policy support
is an important feature of finance for the disadvantaged. However, finance for the disadvantaged is
more than policy financial activities, it is a relatively complete financial system that includes
commercial, cooperative and charity financial activities,. Specific forms of finance for the
disadvantaged varies from country to country.
Generally speaking, a relatively complete financial system for the disadvantaged at least includes
three aspects: financial institutions, a legal system and policy supports..
First, there is a full spectrum of financial institutions that provide finance for the disadvantaged. A lot of
countries have put in place a well-developed system, including government-backed financial
institutions, private partners, commercial institutions and private lending institutions. They interact with
and complement each other to support the development of backward regions, industrial sectors and
disadvantaged groups. For example, as far as support for agricultural development is concerned, in
the US there are government-backed agricultural lending institutions, farmers cooperative financial
institutions, commercial financial institutions and private lending institutions; in Japan, the Agriculture,
Forestry and Fisheries Finance Corporation acts as the policy financial institution, and Japan
Agricultural Cooperatives as cooperative financial institutions; in India, cooperative agricultural lending
institutions, policy financial institutions and commercial banks work together to support the agricultural
development; in addition, in over 40 countries governments have established agricultural insurance
scheme to conduct agricultural insurance business. To support development in backward regions,
various countries have applied policy finance, development finance, and other supportive measures.
So far, there are over 750 financial institutions (40% of which are in Latin America) working for the sole
purpose of developing backward regions. Almost every African country has set up a bank for regional
development. To support disadvantaged groups, over 150 countries have pension insurance
institutions, and half of all the countries in the world have established policy medical insurance
institutions. Furthermore, many countries have student loan schemes in various forms, which have
played an important role in promoting economic development and social stability.
Second, a legal system governing finance for the disadvantaged. Most countries regulate financial
institutions through a fully-fledged legal framework, and strictly separate financial legislations and
regulations into those regulating commercial finance and those targeting policy and cooperative
finance, so that the latter group of financial institutions has their own laws and are free from
intervention. Thus, they are able to serve agriculture, rural areas, disadvantaged industrial sectors and
groups better. Many countries have promulgated special laws to emphasize the importance of the
finance for the disadvantaged, such as Federal Agricultural Loan Act, Agricultural Credit Union Act,
and Community Investment Statute in the US, Law on Japanese Development Banks, Law on Japan
Scholarship Society in Japan, KfW-Gesetz (Law on KfW Development Bank) in Germany, Law on
Korean Development Bank, Law on Long-term Credit Bank of Korea in South Korea, Act on
Agricultural Intermediary Credit and Development Companies in India, etc. These laws are gradually
improved to support and safeguard the development of financial institutions for disadvantaged regions,
industrial sectors and groups.
Third, a system of supportive policies. Investment in less-developed regions disadvantaged industrial
sectors and disadvantaged groups has lower efficiency, diminishing returns, and high risks; therefore,
it is very unlikely to secure capital investment if completely market-oriented. As such, a lot of countries
provide preferential policies, such as capital infusion in development financial institutions, guarantee,
tax holiday, interest subsidy, etc. For example, the German government guarantees all the liabilities of
KfW incurred in supporting the development of disadvantaged industrial sectors and regions, grants it
special treatments such as tax exemption and zero dividend payout to shareholders, and allows all
profits to be used to increase capital. Japan Development Bank is exempted from all local tax, state
tax and corporate tax. The Korean government guarantees the principal and interest payment of
financial bonds issued by Korean Development Bank's to support development of disadvantaged
industries. The US federal government provides credit guarantee to private financial institutions that
give credit to backward regions. In building the railway network in western states, the federal
government granted various favorable financial policies to railway companies to boost their financing
capabilities.
3. The focus in developing the finance for the disadvantaged in China
We have made some progress in developing the financial system for the disadvantaged, but there is a
lot to do compared with that in developed countries and in order to build a harmonious socialist
society. In my opinion, we should make efforts in the following three key aspects to in order to develop
a financial system for the disadvantaged.
First, new measures should be taken to create a financial system for the disadvantaged. Since reform,
some financial institutions have been established for the disadvantaged in China, but there are not
fully fledged. For example, there are structural and operational problems in the rural financial
institutions, such as extensive operational mode, weak management, low profitability, yet-to-be
improved staff quality, and high risks associated with rural credit cooperatives; the Agricultural Bank of
China has not fully functioned as a major player in commercial finance for farmers and rural economy;
the risk compensation, sharing and transferring mechanism is not sound for policy agricultural loans,
guarantee mechanism in rural areas and agricultural insurance are yet to be developed. There are not
enough innovations of financial institutions and supportive policies to meet the needs of farmers'
productive activities and livelihood. Generally speaking, there is room for improvement in the financial
system for the disadvantaged, which should not only include traditional financial institutions, such as
policy, development, commercial and cooperative financial institutions, but also include innovative
financial institutions such as venture capital investment, guarantee, insurance, leasing, micro-credit
financial institutions. Endeavors should be made to create a system in which various types of financial
institutions coexist, complement and compete with each other, each with well-defined functions and
responsibilities to satisfy the demand of disadvantaged industrial sectors, groups and backward
regions for financial services. It is worth mentioning that, micro finance, as a new measure of poverty
reduction, has evolved from the micro loans for farmers in the 1970s, to micro-credit for
microbusinesses in the 1980s, and finance that seeks commercial viability and loan coverage. It has
become an important part in the financial system for the disadvantaged. We have made some trials in
micro finance in the past, and in the future, we will explore a development mode with multiple players
in line with the Chinese situation by drawing on positive and negative experiences in other countries,
so that micro finance can truly and effectively support the majority of disadvantaged.
Second, progress should be made in creating a legal system for finance for the disadvantaged. The
finance for the disadvantaged is part of the financial system, so it carries the features and conforms to
the general principles of the financial system on the one hand; while on the other, its development
follows certain special rules. Thus, it is necessary to strengthen the legal system for finance for the
disadvantaged. The first is to strengthen legislation for policy finance. From the international
perspective, the primary principle here is a separate law for each type of policy financial institutions.
Policy banks in China do not have its own legal framework; instead, they are regulated with reference
to the laws and regulations governing commercial banks. This not only hinders the smooth operation
of policy banks, but also affects how they position themselves. Therefore, we must actively explore
independent legislation for policy financial institutions. Administrative regulations may be promulgated
before they gradually become laws. Second, strengthen regulation and guide of informal finance.
Informal finance, as a complement to formal finance, plays a role in boosting economic activities in
rural areas and poor regions and promoting regional economic development to some extent. However,
due to absence of laws and regulations, it contains a lot of hidden risks. In recent years, informal
finance's positive role is increasingly recognized, but the legal framework is not being developed at the
same time. Therefore, laws and regulations should be created and improved to protect legitimate
informal financial activities and crack down on loan sharks, underground banks, illegal fundraising and
other illegal activities.
Third, adopt new measures in policy support to finance for the disadvantaged. Policy guidance and
support from the government is common in developing finance for the disadvantaged. Government
support should be multifaceted and mutually reinforcing, including legal, economic and administrative
measures, both direct and indirect. As mentioned earlier, from the inception and development of
finance for the disadvantaged in various countries, we can see that government support has played a
central role. Finance for the disadvantaged is based on the effective combination of government credit
and market credit, and reflect the synergy of government support and market performance. To be
more specific, firstly, the government should provide reliable source of capital for specialized financial
institutions, and provide guarantee for their policy lending to ensure sustainability of operations.
Second, emphasis should be laid upon coordination between fiscal and financial policies, reflected in
tax breaks and fiscal subsidies to relevant financial institutions and activities, and in close cooperation
between fiscal and financial departments. Third, more transfer payment should go to disadvantaged
groups, industrial sectors and backward regions in the form of agricultural insurance, unemployment
insurance and minimum subsistence, to support their risk management and debt servicing capability.
These are my personal opinions toward the financial system for the disadvantaged, some food for
thought. Hope they will provoke further research in this area, and hopefully more practice to make the
financial sector more socially responsible in building a harmonious society. I'm open to questions and
challenges.
Thank you!