Zhou Xiaochuan: Strengthen communication and cooperation between the
Mainland and Hong Kong and promote the development of financial
infrastructures
Speech by Mr Zhou Xiaochuan, Governor of the People's Bank of China, at the Seminar on Financial
Infrastructures, co-sponsored by the People's Bank of China and the Hong Kong Monetary Authority,
Beijing, 6 June 2006.
* * *
Ladies and Gentleman, Dear guests,
Good morning.
I am glad to join in the Seminar on Financial Infrastructures cosponsored by the PBC and HKMA. I
wish the Seminar a great success. In recent years, the economic ties between the Mainland and Hong
Kong have become more and more closer. Promoted jointly by the PBC and HKMA, personal RMB
business has achieved healthy development in Hong Kong, and the financial infrastructure
cooperation between the two sides has progressed smoothly. To further enhance such cooperation,
the PBC and HKMA established a financial infrastructure cooperation liaison group and a special
working group in 2006. The Seminar was part of the cooperation program between the Mainland and
Hong Kong.
Today, many experts and senior managements of financial institutions, including banks, securities
companies and insurance companies and financial regulatory authorities attended the Seminar.
Taking this opportunity, I would like to share with you my views on the topics of establishing and
developing financial infrastructures in Mainland, cooperation between the Mainland and Hong Kong in
financial core infrastructures, i.e. payment & settlement system and research on changes of
international payment & settlement system and the promotion of modernized payment & settlement
system as well.
Noticeably, there are many different interpretations of financial infrastructure. In this Seminar, financial
infrastructure would possibly focus on payment & settlement system. But broadly speaking, financial
infrastructure contains much more meanings, such as market infrastructure. I would like to focus on
the development of payment & settlement system in line with the main contents of the Seminar.
I. Development of payment & settlement system vs. the role of central bank
It is well known that payment & settlement system is one of the most important financial
infrastructures. The 11th Five-Year program clearly indicates efforts to improve payment & settlement
system, enhance payment & settlement efficiency and develop sound financial market registration,
custody, trade and settlement system. In a new economic and financial environment, the efficiency
and safety of a payment & settlement system will not only affect public confidence on money and its
transmission mechanism, but also play a crucial role by the central bank in monetary policy
implementation, financial market development and maintaining financial stability. As a payment and
settlement service provider, supervisor and operator of a modern payment and settlement system, the
PBC has made great efforts in guiding and promoting the modernization of China's payment and
settlement system. As an important component of financial infrastructures, the payment system
demands the participation and cooperation of commercial banks and other financial institutions,
despite their different roles in financial service in terms of establishment, development and operation.
The Mainland initiated the construction of payment system later than Hong Kong did. In Mainland,
computer network and communication infrastructures indispensable to financial infrastructure are at
different levels due to regional economic imbalances, given China has a large population and wide
territory. Therefore, the Mainland must consider various elements such as business, technology and
regional economic situation when constructing financial infrastructure. Currently, we focused on the
construction of a payment system. The large value payment system has been extended nationwide in
June 2005, and the layout of a modern payment system will be adjusted in accordance with
technology advancement, the development of commercial banking business and data concentration
level. The retail payment system is under construction and will be extended nationwide at end-June,
2006. At current stage, our priority is still on constructing a disaster back-up system, optimizing system
functions and building a bill exchange system nationwide based on image technology.
II. Closer economic and trade ties between the Mainland and Hong Kong will provide
much broader room for cooperation in financial infrastructure, especially the payment
and settlement system.
The Mainland and Hong Kong have maintained good cooperation in economic and financial field for a
long period of time. Particularly, after Hong Kong returned to the motherland in 1997, the first
important cooperation was to face with the Asian Financial Turmoil. In recent years, with the increase
in commercial, trade, investment and personal exchange between the Mainland and Hong Kong,
cooperation became much smoother. The launch of CEPA not only produced zero tariff and facilitated
commodity trade and transportation, but also promoted the fast development of service trade, such as
the acceptance of professional certificates.
Cooperation in financial field between the Mainland and Hong Kong has also achieved great progress
in recent years. In November 2003, with the authorization of the State Council, the PBC announced to
provide settlement arrangement for personal RMB business of Hong Kong banks. Many new financial
instruments were introduced in 2004, such as the RMB bankcards with Unionpay logo were accepted
in Hong Kong from January 2004. In February 2004, participating banks in Hong Kong started to
conduct RMB deposits, exchange and remittance business. From April 2004, RMB bankcards issued
by Hong Kong banks were accepted in the Mainland. In November 2005, with approval of the State
Council, the PBC extended the scope of the RMB business position squaring and settlement
arrangement for Hong Kong banks including raising the upper limits of some business and allowing
Hong Kong residents to pay their consumption expenditures with checks in RMB denomination. After
the national social security funds being allowed to invest in Hong Kong and other overseas markets,
with approval of the State Council, several policies were soon extended to facilitate different economic
entities to invest in Hong Kong and other overseas market, including wealth management on behalf of
clients, portfolio investment and insurance companies' overseas investments. In recent two years,
Bank of Communications, China Construction Bank and Bank of China were listed in the H share
market of Hong Kong respectively.
Strengthened connection in commodity and service trade, investment and financial cooperation has
brought many new demands for the payment system and FX market. The growth momentum of such
demands is fairly evident. At the same time, both sides' attention on the establishment of financial
infrastructure could ensure the safety and efficiency of financial services. For example, people had
various concerns before the launch of personal RMB business, but it worked out smoothly since all
relevant parties made sufficient preparations. The practice also proved that. These all indicated a
promising trend.
Turning to the Mainland, QFII was introduced into the Mainland in recent years, and in this year,
policies aimed at differentiating domestic investors investing in overseas financial products were
issued. At the same time, efforts were made to develop the FX market by providing more risk-control
tools and introduce market makers and OTC transaction mode. Therefore, the construction of financial
infrastructure will face higher demands, such as how to prevent settlement risks and increase
settlement efficiency to meet changing demands of the market.
Financial service is similar as goods trade in certain aspects. A country could import goods or attract
foreign capitals to produce it in its homeland when it could not make it by itself. As to financial service,
sometimes a country is not able to provide all services or make every service good. So financial
service, including infrastructure service can also be provided by others. The Mainland is now on the
stage of improving the large-value payment system and establishing the retail payment system and
disaster back-up system, therefore, Hong Kong is a good example for us to learn from its successful
experiences in foreign exchange clearing and settlement. Additionally, Hong Kong is developing HK
dollar vs. RMB settlement system as well. Such financial services can be learned and taken by both
sides. Developing financial infrastructure cooperation between the Mainland and Hong Kong is also
one of the results.
Of course, in terms of the strategy of financial infrastructure, the Mainland is aimed at establishing an
integrated sound and effective payment system, which is a dynamic process that will develop a long
time and with competition and cooperation. When taking advantages of Hong Kong financial
infrastructures, we have to bear in mind that the Mainland still exerts control on RMB transactions in
several aspects. The 5th Plenum of the 16th CPC central committee reclaimed the direction of RMB
reform is to realize full convertibility, but it will be a gradual process. While RMB was not a convertible
currency, practices in RMB settlement and foreign exchange clearing and settlement should abide by
relevant rules and regulations.
III. International payment & settlement system development trends and noticeable
changes
A payment & settlement system develops in a complicated and sustainable dynamic manner.
Technology advancement, financial market integration, legal framework and market competition, in
particular the demands of financial market for payment & settlement efficiency and safety, are always
the main factors that promote the development and changes of a payment & settlement system. Due
to those factors, new trends have emerged in the global payment & settlement system and deserved
close attention:
First concerning the arrangement and design of a payment & settlement system. Along with the aim of
controlling legal, operation and financial risks of participants, a payment & settlement system should
provide financial institutions with low-cost settlement credits and better liquidity saving mechanism so
as to increase benefits in addition to providing infrastructure services.
Second, technology advancement, mainly computer network and electronic communication system
development, propels the payment instruments innovation, payment process restructuring and reform.
Internet and mobile payment tools, developed fast in recent years, have enlarged the services scope
traditionally only provided by banks. Technology advancement leads payment process restructuring
and reform, particularly continued strengthening of the compatibility, connection and resilience among
the internal infrastructures of securities, foreign exchange, telecommunication and banks.
Third, a highly efficient, stable and organized market system should be developed in terms of
payments services providing and pricing. Balance should be stricken between market innovation
encouragement and fair competition as well as healthy market development in respect to regulation
framework on market organization, behavior and coordination between main stakeholders and
relevant service design, pricing and market arrangement concerning rules and practices. It will
demand high supervision level on payment and settlement system.
IV. Key issues in the development of payment & settlement system of the Mainland
The abovementioned trends have also reflected development and reform of the payment & settlement
system in China in recent years. Especially in the past 5 years, we have made noticeable
achievements in the construction and development of the payment & settlement system. For instance,
we established the RTGS large-value payment system nationwide and launched automatic
pledgebased financing in May 2006 to facilitate the liquidity management of participants. Currently, the
largevalue payment system has realized interactive links among money market, bond market and foreign
exchange market. DVP settlement was realized in bond trading and the open market operations of the
central bank. At the same time, the payment system provided settlement channels for RMB settlement
in foreign exchange trading, inter-bank business and bond issuance to reduce payment risks while
enhancing payment efficiency. Administration of payment services market has been improved
gradually, and financial institutions and market have provided increasingly many good innovative
products along with the improved supervision on payment & settlement system.
However we should notice that, development of the payment & settlement system is a sustained and
complicated process that deserves in-depth research on many issues. We have only established part
of the system and thus need to develop and improve other parts. At the same time, commercial banks
also made efforts to develop more advanced system to better meet market demands. We should
follow the new trend and adopt new technologies. A unique economic science, called Payment
Economics, which focuses on money exchange mechanism is emerging abroad. Concerning the fast
changing financial environment, payment & settlement system as the core of financial infrastructures
has abundant contents for us to research and explore. I would like to share with you my ideas as the
following:
First, the influence of highly efficient large-value payment system on commercial banks' liquidities and
central bank's monetary policy warrants high attention.
Second, there are rooms for improvement in legal aspect of the payment & settlement system. A safe
and efficient national payment & settlement system requires a transparent, comprehensive and sound
legal framework. With development of the payment & settlement system, some flaws in payment
regulations gradually attracted people's concerns. For example, payment effectiveness of market
participants under bankruptcy and settlement finality of the payment system needs to be clarified by
law. Law on Negotiable Instruments and Rules on Payment and Settlement demands further
amendment and improvement to adapt to the new economic situation. Some products innovations
such as Internet payment, mobile payment and other electronic payments may face risks without
prudent regulation. Institutional arrangement on the payment service market and supervision over
market behaviors requires further clarification and coordination.
Third, increasingly more cross-border financial activities set high demands for an efficient functioning
of and supervision on the payment & settlement system. Economic globalization has caused increased
cross-border financial activities, which requires more multi-currency cross-border payments, so the
traditional payment system focusing on providing settlement services for domestic financial institutions
have evolved along such changes, for example the upgrading of European cross-border payment
system (TARGET), multi-currency foreign exchange trading settlement services provided by the CLS,
the settlement arrangement for US Dollar and the Euro in Hong Kong market etc. In particular, the
foreign exchange payment system of Hong Kong did not settle in central bank money but realized
realtime ultimate settlement through commercial banks' accounts based on clear settlement rules, which
has great significance to the settlement arrangement in Mainland financial market.
Fourth is relevant to the coordinated development between large-value payment system and the
securities settlement system. The latest research of the BIS concluded that, the large-value payment
system of a country should develop harmoniously with the securities settlement system to ensure
safety and efficiency of a financial system. One important reason behind it stems from the
interdependent relations between the large-value payment system and the securities settlement
system. Specifically, capital settlement in a securities system could realize DVP through the
largevalue payment system so as to prevent payment risks. At the same time, the large-value payment
system provides liquidities for participants according to their pledges to reduce liquidity risks, which
needs the support of securities system in return. Turning to the current situation in China, the CBGS
has built interface with the large-value payment system, while the securities settlement system of the
Stock Exchange are under study for how to connect due to many factors. It is important to tackle the
coordinated development between the large-value payment system and the securities settlement
system.
Fifth, in order to promote the long and coordinated development of all components of a country's
payment system, some economies have established special payment and settlement development
committees comprised of different members either all from the central banks, or from the central
banks, relevant regulatory authorities and commercial institutions. The mode of establishing the
payment & settlement system development committee could be explored to examine whether it is
suitable to China's practice.
In short, the Mainland needs to further improve the local currency payment system since we depend
on telecommunication and computer network in such a wide territory. Hong Kong has its advantage on
foreign exchange clearing and settlement and providing payment services for capital market and FX
market. Both sides are complementary to each other in financial infrastructures with different
comparative advantages, and could have more rooms of cooperation. Moreover, development of the
national payment & settlement system relies on joint endeavors of the central bank, regulatory
authorities and various financial institutions. I believe, with our strong confidence and unremitting
efforts, payment & settlement system, either in the Mainland or Hong Kong, will have promising
perspectives.
Thank you.