Xiang Junbo: Deepening financial reform to create a favorable environment for
enterprises
Speech by Mr Xiang Junbo, Deputy Governor of the People's Bank of China, at the Euro Finance
China Conference 2005, Shanghai, 9 November 2005.
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Ladies and Gentlemen,
Good morning. It's a pleasure to be here today to participate in the Euro Finance China Conference. In
recent years, China has been enjoying a rapid economic growth, gradually pushing forward its
financial reform, and continuously pursuing the opening-up policy. Against this background, there have
been significant changes in the business environment of multi-national enterprises. It is of vital
importance for us to discuss the issues regarding Cash, Treasury and Risk Management, which is the
theme of this conference to facilitate an improved business pattern and efficiency for multi-national
enterprises.
As we know, economy and finance serve complementary to each other. An equilibrium and rapid
development of national economy is needed to create a favorable external environment for the
deepening of financial reform. While the introduction of various financial reform measures contributes
to a better business climate for micro-economic participants.
China has been maintaining a stable and rapid economic development momentum in recent years,
and has achieved marked success in many sectors; new progress has been made in the course of
opening up, which guaranteed a smooth conduct of financial reform.
First and foremost, national economy witnessed a steady and quality growth. With the GDP growth of
2005 expected to register at 9.4 %, China's annualized GDP growth rate during " the Tenth 5-Year
Plan Period " is likely to average at 8.8%, representing an acceleration of 0.5 percentage points over
that of " the Ninth 5-Year-Plan Period", while the volatility of economic growth is likely to be controlled
within a band of 2 percentage points, 0.5 percentage points lower compared with that recorded for the
"Ninth 5-Year Plan Period". Generally, China has enhanced the capability for economic growth, and is
much more resilient against fluctuations with heightened economic stability.
Secondly, employment continued to scale up. Employment has become an increasingly pressing issue
for China due to its large population. During "the Tenth 5-Year Plan Period", newly created jobs in the
urban areas increased from 7.89 million in 2001 to 9.8 million in 2004. And the figure is expected to
exceed 9 million this year, which to certain extent will ease the unemployment pressure.
Thirdly, consumption has been steadily upgraded. During "the Tenth 5-Year Plan Period", per capita
disposable income of the urban and rural residents is expected to increase by 9.5% and 5%
respectively a year on average. The continuous and rapid income growth expanded household
consumption, fostering a shift of consumption from focusing on satisfying basic needs to that seeking
to live a comfortable life.
Fourthly, social security system was further improved. A sound social security system constitutes the
basis of maintaining a stable social and economic development. During "the Tenth 5-Year Plan
Period", China's social security system has further been consolidated, with the pilot program of urban
social security system further developed with notable progresses achieved in terms of building
pension, unemployment, and the medical care security system. Efforts have also been made to
explore a security system committing minimum protection for residents in the rural areas.
Fifthly, external sector recorded a rapid development. After the accession into WTO, China engaged
itself more deeply and broadly in the international arena in terms of division of labor. The shift of
international industries stimulated the substantial growth of processing export. China's rapid
industrialization and urbanization process combined with the factors such as abundant labor forces
and cheap prices, etc, created new opportunities for international manufacturing industry. FDI also
maintained rapid growth.
Sixthly, agricultural production remained stable. China's grain production experienced large fluctuation
in the past several years. The shrinkage of grain production and the rise of grain prices once exerted
negative influences on the economic development. Thanks to the concerted efforts, grain production
of this year started to rebound, removing the supply-demand gap, which has contributed to the stability
of grain production and prices.
In the context of a sustained and rapid development of national economy, China has continuously
introduced various measures to speed up the share holding restructuring of the wholly stated owned
commercial banks, to foster an improved financial market, to conduct the reform on RMB exchange
rate regime, and to advocate the construction of financial eco-system, etc. All these measures will
definitely impose profound influences on the business environment of enterprises.
First, the share holding reform of the State-owned commercial banks has helped establish credit
discipline, which could gradually reduce the enterprises' reliance on the banking system for finance. In
recent years, China has consistently pursued the principles to establish a standard corporate
governance structure and to transform the operational mechanism. Through the deepening of internal
reform, and backed by the favorable government policies and financial support, the restructuring aims
to develop a new system and new mechanism required by the modern financial institutions. So far, the
Bank of Communications has successfully completed IPO, China Construction Bank also was
successfully listed in HK Stock Exchange on October 27. The Industrial and Commercial Bank of
China has completed their share holding restructuring. The credit business of commercial banks will
be more rationalized on one hand with the gradually improved corporate governance structure and the
strengthened external supervision, on the other hand, commercial banks have to adopt cautious
stance for their business expansion due to the rigid requirement on capital adequacy ratio. Against this
background, enterprises are encouraged to explore new financing channels instead of overly
depending on bank loans for financing needs. Meanwhile, financial innovations are advocated to
mitigate potential risks in the economic and financial operations.
Secondly, financial market was further improved, facilitating the market access of enterprises, and
making it possible to rationalize the financing structure. We speeded up the development of financial
market especially the inter-bank bond market in order to address the waning direct financing
proportion and to diversify financing channels for enterprises while further steps were taken to
implement the commercial bank share holding restructuring. Highlighting market principles,
institutional investors were cultivated in the course of inter-bank bond market development while
priority attention was paid to preventing new risks. With major measures in place, qualified enterprises
were allowed to issue short-term financial bills in the inter-bank bond market; foreign-funded
commercial banks with RMB business license can join bond underwriters' syndicate to provide
underwriting services in the inter-bank bond market; International development agencies were
approved to issue RMB bonds in the national inter-bank bond market; Pan-Asia Bond Index Fund and
ABF China Bond Index Fund have been launched in the inter-bank bond market; Bond forward
transaction has been introduced; Efforts have been made to improve information disclosure system,
and strengthen market disciplinary mechanism. etc. The adoption of these measures signified an
important step forward to enhance the influence of financial market as well as its role in resource
allocation; Enterprises could enjoy the access to broader financing channels, and favorable conditions
were created to prevent them from exposing to risks. At the same time, these measures lay a
foundation for the rapid development of financial derivative products.
Thirdly, better exchange risk management of enterprises is required by the RMB exchange rate
regime reform. On July 21 this year, the PBC announced to reform the exchange rate regime by
moving into a managed floating exchange rate regime based on market demand and supply with
reference to a basket of currencies. This reform is a self-initiated action consistent with the reality of
China's market economy situation. In the short term, some less competitive enterprises are bound to
face intensified pressures. In this case, the enterprises should lose no time to learn and master all
possible instruments to hedge foreign exchange risks and to become more adaptable to the floatation
and movement of exchange rate. However, in the long run the adjustment of the exchange rate will
provide incentives for these enterprises to transform their operational mechanisms, strengthen their
self-innovative capability, accelerate economic restructuring, shift growth patterns of foreign trade, and
upgrade the overall efficiencies of national economy. It is also conducive to achieving a basic
equilibrium of the trade balance in goods and services, strengthening the independence of monetary
policy, and enhancing the preemptiveness and effectiveness of financial macro control policies.
Fourthly, 9 reform measures on foreign exchange capital management were launched on a trial basis
in Pudong district Shanghai with the purpose to create a favorable policy environment for multinational
enterprises. Previously, taking the facilitation of trade and investment, and the improvement of
exchange market construction into consideration as the basic principle, reform on foreign exchange
management was spearheaded in an innovative, gradual and controllable way as required in Pudong
District of Shanghai by introducing the 9 policy measures, steps will be taken to conduct centralized
management of foreign exchange capital in the domestic market, centralize the management of RMB
capital, deal with cross-border capital operation, streamline the procedures of trade revenue and
expenditure in foreign exchange, streamline the procedures under non-trade item, pursue financial
innovation, and establish a monitoring and assessment system. The introduction of these policies is
bound to facilitate the centralized foreign exchange management of multi-national enterprises,
enhance their regional headquarters' capability of foreign exchange management, it also marks great
significance to expand cross-border capital utilization of enterprises, support domestic enterprises'
overseas investment, encourage banks to conduct derivative products innovation, and to create a
favorable policy environment concerning foreign exchange management.
Fifthly, financial eco-system was improved, laying a solid foundation for the sustained development of
various enterprises. The concept of financial ecology construction initiated by the People's Bank of
China has received nation-wide attention recently. Financial ecologic situation will not only affect the
transmission of monetary policy, efficiency of resource allocation, financial stability and development,
but also directly take effects on the operation and transaction costs of enterprises as well. A sound
financial ecologic environment comprises not only comprehensive and integrated institution building on
a macro basis, but also improvements in micro infrastructures related to corporate governance, credit
culture both for individuals and enterprises, bank-enterprise relationship, intermediary services, etc.
With regard to the financial ecology construction, great efforts have been made to enhance the legal
system building, engaging in the research, deliberation and draft work on some related clauses in the
"Property Law", " Enterprises Insolvency Law" and the "Criminal Law" in terms of property right and
financial claim protection and the definition of financial crimes. On the other hand, a nation-wide
publicity campaign concerning financial ecology construction has been launched to create a sound
institutional and public environment, so as to ensure various enterprises develop on an equitable
basis.
These financial reform measures not only stressed the market-based orientation of China's financial
reform, but also reflected the goals of our reform to create a favorable environment for enterprises.
The People's Bank of China will continue to push China's financial reform forward in a steady manner,
guaranteeing a better monetary and financial environment for enterprises.
Taking future development trend into consideration, China's economy is expected to enter a stage
characterized by steady growth. Currently China is speeding up its urbanization and industrialization
process with corresponding growth in investment and demand. Consumption is expected to expand
further due to the large population; steady increase of household income and an upgraded
consumption structure will also benefit consumption; and favorable external environment will continue
to serve a strong engine for China's economic growth. All these positive factors will provide a sound
macro economic environment for the deepening of financial reform.
Now I would like to share my insights with you on the financial reform and development trend closely
related to the development of enterprises.
First, continue to pursue a sound monetary policy. In 2006, China will continue with its sound
monetary policy, measures will be taken to maintain the steady growth of money and credit, monetary
policy will play a greater role in keeping RMB value stable and managing the equilibrium of money and
credit aggregates. Based on the changes of economic and financial situation, PBC will maintain
appropriate growth of money and credit by using a mix of monetary policy instruments in a flexible
manner and controlling the scale of policy. Efforts will be made to provide quality financial services to
enterprises by strengthening the coordination between RMB and foreign currency policies, and
improving the formation mechanism of RMB interest rate and exchange rate. In the future, on one
hand the PBC will make adjustments of the exchange rate band when necessary in line with the
market development as well as the economic and financial situations. At the same time, the PBC will
exercise due responsibility to conduct management and adjustment of the RMB exchange rate based
on market supply and demand so as to safeguard a more flexible exchange regime on a market basis
and to ensure that the RMB exchange rate is basically stable at an adaptive and equilibrium level. On
the other hand, it's not enough by the exchange rate alone to keep the equilibrium of BOP due to the
price rigidity existed in some aspects of China's economy. Continuous internal economic policy
adjustments are needed to strengthen the coordination between various macro policies, expand
consumption, and ensure a balanced development between economic restructuring and the BOP.
Secondly, Actively promote the construction of financial market. Currently, the financing structure,
featuring high proportion of indirect financing and low proportion of direct financing, remains to be
rationalized. Financial risks are too much concentrated in the banking sector, which weakens the role
of market in resource allocation and results in the high financial leverage ratio of enterprises. Such a
financing structure has also brought about difficulties in the conversion of savings into investment,
asset and liability management and risk control. Prime attention will be paid to developing direct
financing products and risk management instruments, further promoting financial innovation and
market system construction. Financial bonds issued by commercial banks as a new liability instrument
will be launched on a timely basis to improve the status of maturity mismatch between asset and
liability. Efforts will also be made to actively develop institutional investors, and expand the scope of
investors. The market infrastructure will be strengthened to create a sound legal and technical
environment for the development of financial market. More financial derivative products will be
gradually introduced in line with the market situation, while the monitoring, analysis and regulation
concerning market risks will be intensified to ensure a sound, effective performance of financial
market.
Thirdly, speed up the reform of financial institutions. Under the overall guidance of financial system
reform, China will continue to conduct the share holding restructuring of wholly state owned
commercial banks by introducing various measures to transform their operational mechanism and
improve corporate governance. The overhauling of policy banks will escalate to transform them into
development financial institutions with strong competitiveness and financial viability in accordance with
the requirements of the market economy. Comprehensive financial reform will be carried out in rural
areas, steps will be taken to deepen the reform of RCCs, and some pioneering work will be launched
to explore an effective pattern to combine policy and commercial financial support for the rural
economy. Participation of social capital in the restructuring of small and medium-sized financial
institutions will be encouraged. With strengthened supervision and capital base, financial institutions
with various ownership structures will be cultivated. Deposit insurance system will be improved in
order to develop a deposit insurance system compatible with Chinese situation.
I would also like to take this opportunity to give you a brief introduction of the People's Bank of China
Shanghai Head Office. The PBC Shanghai Head Office was established on August 10 this year; its
establishment will promote the development of Shanghai as an international financial center, take
advantage of the first-hand contacts with the financial markets, and enable the central bank to better
serve the financial markets. As an integral part of the PBC Headquarters, the PBC Shanghai Head
Office will perform its functions under the guidance and authorization of the PBC Headquarters, and is
mainly responsible for the implementation and management of part of the central bank's business. The
goal is to build Shanghai Head Office into "Two Platforms, One Window and One Center", namely, the
platforms for the open market operation and the monitoring of financial markets, an important window
for international exchange and cooperation, and a center for some financial services and related
researches and development work. By far, the construction of Shanghai Head Office is undergoing
smoothly, I hope through joint efforts by all relevant parties, Shanghai Head Office will play an active
role in boosting financial market construction, promoting the efficiency of central bank's financial
services, and creating a better financial environment for enterprises.
Finally, I wish this conference a complete success.
Thank you.