China's Road to Greater Financial Stability
Back Matter

Back Matter

Author(s):
Udaibir Das, Jonathan Fiechter, and Tao Sun
Published Date:
August 2013
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Afterword

Two years after the successful completion of China’s first assessment under the Financial Sector Assessment Program (FSAP), the International Monetary Fund (IMF) has arranged for publication of this collection of writings on China’s Road to Greater Financial Stability: Some Policy Perspectives. I would like to express my gratitude to the IMF and the experts who have contributed to this book. I hope that the book will enhance everyone’s understanding of the challenges of the reform process, as well as the planned development of China’s financial industry that will play a positive role in further improving the robustness of the country’s financial system.

After the Asian financial crisis, the IMF and the World Bank jointly introduced the FSAP to provide a comprehensive and objective assessment of the robustness of member-country financial systems, reduce the possibility that financial crises would occur, and promote financial reform and development. The current global financial crisis has further underscored the importance of financial stability assessment work. The G20 leaders have committed themselves twice, at their summits in Washington and London, to the need to undergo assessments under the FSAP. China launched its FSAP assessment in August 2009. After careful planning and diligent work on the part of the People’s Bank of China (PBC), other concerned departments, and the China FSAP team, the assessment was completed in November 2011. The assessment was a comprehensive “physical exam” of China’s financial system and its financial stability framework from a global perspective. It affirmed China’s accomplishments with respect to financial reform and developing and maintaining financial stability. The assessment, however, also identified potential risks to China’s financial system and proposed several noteworthy ideas pertinent to the country’s financial development.

This book is grounded in the context of taking China’s financial industry reform and development as the point of departure, with the focus on the country’s financial stability policies, challenges, and approaches. Based on an analysis of the potential risks China’s financial industry faces, the book proposes financial stability policy measures that China should adopt as it moves forward.

The Chinese government has consistently attached great importance to financial stability. As early as 1997, when the crisis erupted in Asia, the Chinese authorities recognized that deepening reforms and strengthening financial regulation were important foundations for preventing and managing systemic risk. Since 1997, we have earnestly learned from the lessons of the crisis. We have comprehensively overhauled the financial system and disposed of a group of local and problematic small and medium-sized financial institutions, effectively eliminating hidden risks that had accumulated in the financial system over its history. In particular, since 2003, we have resolutely upheld an overall path of reform and development to promote stability, seized strategic opportunities to promote stable and relatively rapid growth of the Chinese economy, and decisively advanced and completed a series of major financial reforms.

Through the “quartet” program of writing off capital that was in fact already lost, stripping and disposing of nonperforming assets, using foreign reserves to effect capital infusions, and completing domestic and foreign initial public offerings, the major commercial banks have undergone historic changes. Their financial condition has improved dramatically, corporate governance has been continuously upgraded, risk tolerance levels have been markedly improved, and overall performance continues to improve. This laid a strong microfoundation for the financial industry’s response to the global financial crisis in 2008, and afforded the financial system the ability to provide ample credit support and financial services for economic recovery.

At the same time, we persisted with market reforms, developing the bond market and encouraging and supporting product and systems innovation that conformed to market-based principles to improve the resource allocation function. We have also attached importance to upgrading and implementing international standards for financial system health, implementing the Basel Capital Accords, placing special emphasis on capital adequacy ratios and capital quality, and substantially increasing disclosure requirements as well as accounting and external audit standards.

Since 2005, the PBC has also published an annual China Financial Stability Report that comprehensively monitors and assesses the resilience of the financial system.1 All these efforts, in concert with the work of other financial regulatory agencies, have continually strengthened China’s ability for timely monitoring and evaluation of financial system risk.

Since 2008, in the headwinds of a once-in-a-century global financial crisis, the authorities have decisively implemented aggressive fiscal policies and moderately loose monetary policy, which smoothed the path for the Chinese economy toward stabilization and recovery. Thereafter, targeting new situations and issues that arose as a consequence of China’s economic advancement, we have prudently made use of instruments such as interest rates, foreign exchange rates, deposit reserve rates, and open-market operations to promote reasonable growth in money and credit, adjust and optimize credit structures, and maintain steady and relatively rapid economic growth.

Starting in 2010, we actively established countercyclical macroprudential policy tools and implemented a dynamic differential reserve requirement measure with respect to certain banks that had relatively rapid credit growth and were systemically important. This has allowed us to limit excessive growth in credit and reduce inflation, with some positive results. The deep and unpredictable spillovers from the financial crisis continue to surface even today, and the global economic slowdown, monetary easing, and crisis-related fiscal measures in certain major economies have increased the difficulty and complexity for China to manage its financial system. Managing inflationary expectations and cross-border capital flows, for example, poses an ongoing challenge. We will carefully consider these factors in the policy framework and respond appropriately.

As this book suggests, certain potential risks and challenges remain in China’s financial industry and must be resolved. We must perfect the countercyclical macroprudential policy framework and better balance the relationships between promoting economic growth, maintaining price stability, and preventing financial risk. We must establish a broader crisis management framework; improve systemic risk monitoring, assessment, and early warning systems; strengthen financial regulation; and address regulatory gaps and inadequacies. And we must establish systems that are more market-oriented, improve liquidity management, strengthen corporate governance of financial institutions, and expand financial markets and financial services.

Most of these have already been expressly stated in China’s Twelfth Five-Year Plan. They were further emphasized at the National Financial Work Conference and the Central Economic Work Conference in late 2012. This demonstrates that the recommendations of the China FSAP team are essentially consistent with China’s overall path to advance financial reform and maintain financial stability. As a developing country and an economy in transition, while drawing on international experiences and practices, we will comprehensively, systematically, and methodically press ahead with reforms that are suitable to China’s particular circumstances and consistent with the characteristics of the domestic financial industry.

China’s financial industry today stands at a new historic starting point. Against a backdrop of continued deepening of economic and financial globalization and integration, China has new strategic opportunities to expand domestic demand, improve innovation capacity, and promote a transformation of its economic growth pattern. Further deepening of reform, and opening up and development of China’s financial industry, are critically important to promoting stable and sustainable development in China and even in the global economy.

In accordance with the requirements of the Twelfth Five-Year Plan, we will continue to accelerate reforms in focus areas and accelerate the establishment of a multilevel financial market system that is globally competitive and resilient to systemic risk. We will continue to implement sound monetary policy, strengthen the flexibility of monetary operations, steadily promote interest rate and foreign exchange rate liberalization, and gradually achieve renminbi capital account convertibility.

In particular, in light of the lessons of the global financial crisis, we will firmly ensure that finance serves the real economy, and prevent financial activities from deviating from the demands of the real sector. To this end, we must promote rational distribution of various financial services, expand financial support to weak areas, actively expand domestic demand, safely guide urbanization, maintain reasonable social financing, enlarge the coverage of financial services in the real economy, and diversify financing channels. This approach will help reduce the financing costs of economic development, markedly increase the level of financial services to the real economy, and establish a sound and modern financial system that promotes macroeconomic stability and supports economic growth and development.

The deeper impact of the global financial crisis is not over yet. The legacy of the crisis will last for a while. All countries need to strengthen policy coordination and cooperation. We are grateful for the tireless efforts of the IMF to promote international financial system reform and global financial governance, and we are grateful as well for everyone’s concern and support for China’s financial industry. As always, China will implement international financial standards and norms and deepen bilateral and multilateral economic and financial policy dialogue and coordination, while also continuing to strengthen cooperation with the IMF to jointly promote financial stability, economic prosperity, and sustainable growth in China and the world.

Zhou Xiaochuan

Governor

The People’s Bank of China

Index

aggregate liquidity, 80b, 93

Agricultural Bank of China (ABC), 14, 15f, 202

A-share markets, 164t, 170f, 171f, 175

Asian financial crisis (1997–98), 71f

asset growth rate, past decade, 18–19, 18f

asset management companies, 18, 197–198

asset markets, 113–117, 116f, 181. See also specific markets

assets owned by residents, 167–168, 167f

bail-in, 55

banking industry. See also China Banking Regulatory Commission (CBRC); specific components; specific types of banks

  • aggregated balance sheet, 90t

  • asset growth rate, past decade, 18, 18f

  • assets, 147, 203, 205f

  • challenges facing the, 150–152, 203–209

  • credit channel, 131b

  • credit policies, influences on, 130

  • evolution of, 147

  • fees, liberalization and opportunity for, 195–196

  • governance, 130, 138, 141–142, 153

  • growth, 147

  • incentive structure, 132, 136–137

  • innovation, elements affecting, 149–150

  • licensing, 149

  • loan and deposit rates, liberalizing, 44–45, 45f

  • local government link (case study), 134–137, 136f

  • policy recommendations, 137–138

  • profitability measures, 132

  • profit margin stability, 129

  • reserve ratios, 90f, 207f, 208

  • reserves buffer role, 90–91, 91f

  • risk management, 132, 138, 149, 151–152

  • roadmap for reform, 45–46, 45f

  • state involvement, consequences of, 150–151

  • structural liquidity, 126–129

  • surplus liquidity gaps, 89–90

  • trade income, liberalization and opportunity for, 195–196

  • window guidance policies, 130

banking industry structural characteristics

  • domestic funding dominance, 124–125

  • government influence, 130–132

  • interest rate controls, 126–129

  • introduction, 123–124

  • leverage, regulatory limit on, 132

  • NPL ratios, emphasis on low, 132, 135

  • shadow banking system, 132–134

  • structural liquidity, high, 126–129

Bank of Beijing, 18

Bank of China (BOC), 13, 14f, 15f, 141–142, 195, 202

Bank of China Hong Kong (BOCHK), 109, 199

Bank of China Macau (BOCM), 109

Basel Accord, 23

Basel Committee on Banking Supervision (BCBS), 23, 54, 141, 160–161

bond market

  • bonds under custody, 176t

  • combined volumes, 164t

  • development of the, 19, 20f

  • foreign investments, 197–198

  • growth forecast, 193

  • offshore, 100–101

  • present-day concerns, 168

  • reforms realization, 23

  • turnover and pricing, 98–100, 99f, 100f

bond market capitalization, 168, 169f

bonds

  • as debt share, 71f

  • financing of the economy, 166f

  • government-guaranteed, 67

  • institutions issuing majority of, 147

  • percentage of personal financial assets, 167f

Brazil, debt-to-GDP ratios, 73

brokers, liberalization benefits for, 197–199

call-loan (uncollateralized) market, 94–97, 95f

capital account liberalization, 46, 199, 213–215

capital flows

  • asset markets, effect on, 113–117, 116f

  • financial stability, impact on, 110–117

  • recent trends in, 106–110, 107f

  • and risks for Chinese banks, 112

capital markets

  • deepening to balance banking system dominance, 137, 182

  • development guidelines, 165

  • economic development role, 165–166

  • growth in, 163

  • issues, current, 147, 166f, 168–171

  • priorities and reform measures, 171–173, 172t

  • service providers, 164t

  • stability, impact on, 173–175

  • supervision, strength of, 175

  • systemic risks, 173

Cecchetti, Stephen G., 73

Central Finance Work Committee, 202

Central Huijin Investment Company, 13

Chen Yun, 179

China Banking Regulatory Commission (CBRC)

  • achievements, 148

  • cooperation and information sharing, 24

  • corrective and legal authority, 148

  • deposits required for lending, 85

  • focus areas, 142–144

  • international standard-setting role, 154

  • issues, current, 148–151

  • recommendations for, 148, 152–154

  • regulation and supervision, strengthening, 141–144, 148, 152, 153–154

  • stability, responsibility for, 49

  • window guidance policies, 130

China Cinda Asset Management, 18

China CITIC Bank, 18

China Construction Bank (CCB), 13, 15f, 202

China Everbright Bank, 18

China: Financial Sector Assessment (FSA), 25

China Financial Stability Report (PBC), 53–54, 157, 218

China Huarong Asset Management, 18

China Insurance Protection Fund, 159

China Insurance Regulatory Commission (CIRC), 24, 49

China Life Insurance, 18

China Reinsurance Group, 18

China Securities, 159

China Securities Investor Protection Fund, 159

China Securities Regulatory Commission (CSRC), 24, 49, 173, 175, 193, 202

commercial bank lending, 147–148, 151

commodity futures, 163

Communist Party of China Central Committee, 201

Communist Party of China State Council, 13, 49, 57, 58, 59, 150, 154, 201

consumer protection entities, 25

corporate bond market, 19

corporate debt financing, 192

corporate governance systems, 13–19

credit allocation process, 130–132

credit cooperatives, 159

credit market forecast, 192–193, 192f

credit risk management

  • CBRC focus on, 148–149, 151

  • Local Government Financing Platforms (LGFP)-related exposures, 135–136, 151

  • NPL targets and, 132

  • policy recommendations, 123, 137

  • shadow banking sector and, 134, 151

crisis management

  • framework, effective, 57–59

  • global trends in, 51, 57, 59

  • need for, 38, 43, 50

  • reform recommendations, PBC, 84–85, 88, 93

currency mismatch risk, 74, 112

Dai Xianglong, 202

data collection/database development, 24, 52–54, 148

debt

  • bonds, 71

  • China (1986–2010), 71t

  • China (2000–10), 70–74, 72t

  • global-China compared, 72t

  • loans as a share of, 71, 71f, 147

  • by sector, 72f, 72t, 73

  • sovereign liabilities, 67

debt structure, 72f, 72t, 73

debt-to-GDP ratio, 54, 70–74, 71f, 72f, 72t, 173

DeLong Group, 159

deposit insurance program, 25, 58, 159–161

deposit insurance system, 25, 34, 58, 159–161

deposit rates

  • deregulation, impact on NIM, 194

  • equity market returns and, 127, 128f

  • globally, 127f

  • household, 38

  • inflation and, 45f

  • market-determined, 34, 36, 45–46

  • post-reform, 194

deposit remuneration, 127, 128f

deposits

  • bank funding reliance on, 127

  • change in (2005–12), 208f

  • domestic, reallocation of, 127, 129

  • globally, 126f, 127f

  • growth in, 126, 204–205, 208

  • for lending, CBRC requirements, 85

  • offshore, 108, 112–113

Dickinson, Frank Greene, 64

Dim Sum bonds, 199

Dodd-Frank Wall Street Reform and Consumer Protection Act, 161

domestic markets, deepening of, 19–21

dot-com bubble (2000), 71f

Eakin, Franzy, 64

economic ascendancy, 1

economic growth, 73–75, 123–124, 134, 136, 180–181, 191, 218–220

economic stability, global, 22f, 29, 180, 183, 215

economic stimulus, 147–148

employment growth, 30f

enterprise debt, 68

equity market, 113–115, 166f, 168, 170f, 197–198

Everbright Bank, 202

exchange rate

  • currency mismatch risk, 74, 112

  • expectations, effects of, 115–117, 116f

  • liberalization considerations for, 102–103, 151

  • reform of the formation mechanism, 21

  • roadmap for reform, 40–42, 42f

  • stability, global economy and, 22f

  • structural liquidity and, 102

  • volatility, risk from, 74, 111, 113, 214

exchange rate flexibility, 21–23, 117, 212–214

exchange rate formation mechanism, 21

expanding the cage philosophy, 179

financial depth, global, 110, 110f

financial derivatives market, 19, 21

financial market development, 147, 214–215

financial sector

  • absorptive capacity, 110

  • liberalization’s impact on, 191–199

  • present-day challenges, 219

  • restructuring (1990s), 201–203

Financial Sector Assessment Program (FSAP), xii–xiii, 25–26, 141–144, 158, 217

financial services sector, 1, 147

Financial Stability Board (FSB), 23, 141, 161

Financial Stability Committee, 44, 59

financial statistics information system, 24

financial system, present-day

  • liquidity and control in defining, 27, 28f

  • overview, 146–148

  • risks of maintaining, 31–32, 31f

foreign direct investment (FDI), 106, 108–109, 119, 182, 186, 203

foreign exchange reserves

  • accumulation drivers, 182

  • managing systemic risk, 158

  • other countries plan to add renmibi, 107

  • pressures to accumulate, 214

  • recapitalization using, 202

  • size of, 74, 203

  • slowing accumulation of, need for, 76

  • structural liquidity and, 85, 86f

foreign exchange risk, 112, 151, 214

foreign-owned banks, 23

foreign-owned insurance companies, 23

foreign reserve assets, 28f, 66, 66f, 74, 80t, 86f

fund management companies, 19, 23, 164–165

futures derivatives market, 168, 176t

Futures Investor Safeguard Fund, 24

Galaxy Securities, 159

global economic stability, 22f, 29, 180, 183, 215

global financial crisis

  • balance-sheet-approach perspective, 64

  • debt level post-, 73

  • debt-to-GDP ratio, 71f

  • elements underlying, 55

  • exchange rate in weathering the, 22

  • government response, 217–219

  • structural liquidity and, 79, 80b

  • Western supervisory model failures post-, 145

global financial depth, 110, 110f

global rebalancing, 201–209

gold market reform, 21

Goldsmith, Raymond W., 64

Growth Enterprise Board (GEB), 163, 168, 173

Guangdong International Trust and Investment Corporation (GITIC), 159

Hong Kong Monetary Authority Memorandum of Cooperation, 100

Hong Kong renminbi deposits, 108, 199

HSBC, 195

Hu Jintao, 199

India, debt-to-GDP ratios, 73

Indonesia, financial reform (1982–96), 33

Industrial and Commercial Bank of China (ICBC), 14, 15f, 132t, 202

industrialization strategy, 74

inflation, deposit rate and, 45f

innovation

  • acceleration, results of, 31–32, 52

  • in banking, rate of, 149–150

  • discouraging, results of, 146

  • efficiency and, 186–187

  • factors encouraging, 19, 21, 165

  • risks associated, 42, 143, 175

  • supervision and, balancing, 142–143

insurance companies

  • asset growth rate, past decade, 18f, 19

  • foreign-owned, 23

  • liberalization, impact on ROI, 198

  • reforms, 18, 159

  • stability, responsibility for, 49

Insurance Protection Fund, 24

interbank bond market, 98–100, 99f, 100f

interbank foreign exchange market, 21

interbank funding, 89f

interbank market, 19, 21, 93

interest rate liberalization

  • benefits of, 34–36, 38f

  • deposit rates, impact on, 194

  • insurance companies’ ROI and, 198

  • the last decade, 21–23

  • NIM, impact on, 194

  • policy recommendations, 137

interest rates

  • formation, 23

  • money market, 94–98, 95f, 96f, 97f, 98f

  • reserves relationship to, 42, 43f, 91, 92f

interest rate structure, 88f

International Association of Deposit Insurers, 160–161

International Financial Reporting Standards (IFRS), 149

International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP), xii–xiii, 25–26, 141–144, 158, 217

International Monetary Fund (IMF) Special Drawing Rights (SDR), 70, 215

investment banking, 175

investment companies, 159

investment-driven government, 74

Investor Protection Bureau, 173

investors, safety net for, 159, 160–161

Japan

  • debt ratio, 72

  • financial reform (1975–90), 34, 192, 195–196

  • overseas assets holdings, 197

joint-stock commercial banks, 124–125, 126f, 130

joint venture banks, 23

Korea, financial reform (1980–86), 35

land assets, value of, 65–66

large commercial banks (LCBs)

  • bonds issued, 147

  • dominance of, 124–125, 126f, 168

  • initial public offerings, 14

  • interbank funding, 89f

  • investment banks segregation from, 175

  • liquidity surplus in, 85

  • net foreign exchange as share of assets, 206f

  • NPL loans, 15f, 202, 204f

  • ownership of, 132t

  • reforms, 158–159

  • reserve ratios, estimated, 90f

  • shareholders, primary, 130, 132t

  • state-owned, shareholding reforms, 13–15, 14f, 15f

  • total assets, 14f

  • trade balancing as share of assets, 205f

Law of the People’s Republic of China on the People’s Bank of China, 157–158

Law on Commercial Banks, 130

lending. See also nonperforming loans (NPLs)

  • commercial banks, 147–148, 151

  • Local Government Financing Programs (LGFPs), 134–138, 136f, 142

  • offshore, 101

  • real estate market, 75, 134, 142

  • targets, 130–132

lending, deposits required for, 85

lending rate pricing, 194

leverage ratio, 54, 70–74, 71f, 72t, 173

Li, Yang, 64

liberalization

  • benefits of, 36–38, 40f

  • financial sector, impact on, 191–199

  • rationales for, 191–192

  • sequencing considerations, 102–103, 117–118

Lipsey, R. E., 64

liquidity. See also under Peoples Bank of China (PBC), liquidity management

  • domestic, developments in, 85–93

  • historically, 79–81, 85

  • overview, 79, 80b, 81

  • structural changes affecting, 93

  • surplus, growth in, 85, 86f

liquidity crisis, 93

local government- banking system link (case study), 134–137

local government debt, 68, 73–74, 181–183

local government financing platforms (LGFPs)-related lending, 134–138, 136f, 142, 151

local government financing vehicles (LGFV) (di fang rong zi ping tai), 63–64, 68, 74, 75, 113

local government microfinance development, 144

macroeconomic policy framework, 34, 214

macroeconomic stability, 4–5, 180, 181–183

macroprudential framework, 24, 53, 59

macroprudential management, 24, 56–57, 159–161, 218–219

macroprudential regulation, 13, 45, 50

market development risk, 118–119, 151

market efficiency improvements, 13

market liquidity, defined, 80b

market risks, 13

Mexico, financial reform (1988–93), 39

microfinance, 144

microprudential regulation, 54–55

Ministry of Finance, 49, 59, 130

Minsky, Hyman, ix

mismatch risk assessment, 74–75

Mohanty, M. S., 73

monetary policy framework

  • quantitative lending targets, 130–132

  • roadmap for reform, 40–47

money market interest rates, 21, 46, 86, 88–91, 94–98, 95f, 96f, 97f, 98f

money market regulation, 23, 55

National Association of Financial Market Institutional Investors (NAFMI), 21

National Bureau of Statistics (NBS), 64

National Financial Work Conference, 25

net interest margin (NIM), 193–195, 195t

New China Life Insurance, 18

nonbank financing, future of, 43–44, 192–193, 193t

nonperforming loans (NPLs)

  • contingent liabilities due to, 68–69, 70, 74, 75

  • minimizing, consequences of, 151

  • policy limits on, 132

  • reduction policy (1990s), 201–203

nonperforming loans (NPLs) ratios

  • BOC, 15f, 202

  • large commercial banks, 15f

  • low, emphasis on, 123, 130, 132, 135, 147, 151

  • rural credit cooperatives, 15

nonpolicy banks, 147

Notice Concerning Deepening Financial Reform, Rectifying Financial Order, and Preventing Financial Risk (Guanyu Shenhua Jinrong Gaige, Zhengdun Jinrong Zhixu, Fangfan Jingrong Fengxian De Thongzhi), 201

offshore bond market, 100–101

open-market operations (OMOs), 82, 85–86, 89, 93

oversight

  • capital markets, 175

  • challenges needing to be addressed, 150–152

  • conclusions, 154–155

  • G-20 countries, lessons to be learned from, 34

  • introduction, 5–7

  • paternalistic approach, 146

  • present-day, 148–150

  • roadmap for reform, 43

  • rules-based prudential framework discouraging innovation and change, 146

  • strengthening, CBRC focus on, 141–144

  • Western model, 145–146

over-the-counter market, 19, 168

Panda bonds, 196

pension liability, 69, 74, 75

People’s Bank of China (PBC)

  • bills outstanding, 208f

  • challenges, present day, 205, 208–209

  • conglomerates, consolidated supervision framework, 152

  • consumer protection entities, 25

  • control, reliance on, 27

  • Financial Stability Committee membership, 59

  • foreign assets, 86f

  • liquidity management

    • administrative tools, 82–84, 83f

    • benchmark deposit rate structure, 83f

    • benchmark lending rate structure, 83f

    • bond market turnover and pricing, 98–100, 99f, 100f

    • conclusions, 102–103

    • facilities, 82–85

    • instruments, 82–85

    • lending rate structure, 83f

    • methods used for, 27, 28f

    • money market interest rate, 94–98, 95f, 96f, 97f, 98f

    • objectives, policy instruments for achieving, 82–85

    • offshore bond market, 100–101

    • OMOs, 82, 85–86, 89, 93

    • operations and facilities framework, 82–85

    • sterilization and, 28, 42, 82, 85–88, 87f

  • Memorandum of Cooperation, 100

  • monetary policy framework, 40–43

  • reserve requirements, 28

  • stability, responsibility for, 49, 53–54

  • systemic risk, monitoring and management role, 157–158

People’s Insurance Company of China, 18

People’s Republic of China: Detailed Assessment Report of China’s Implementation of International Standards and Principles in the Financial Field (DAR), 25

Peoples Republic of China: Financial System Stability Assessment (FSSA), 25

policy bank bonds, 67

policy banks, 18, 125f, 130, 137, 146–147, 153

Postal Savings Bank of China, 15f

productivity growth, 180, 181

Qualified Domestic Institutional Investor (QDII) program, 46, 110, 164

Qualified Foreign Institutional Investor (QFII), 164

Qualified Foreign Institutional Investor (QFII) quotas, 23, 110

Qualified Foreign Institutional Investor (QFII) system, 46, 109

real estate lenders, 75, 134, 142

real estate market

  • bank exposures, 113, 129

  • capital flows effect on, 113–115

  • growth of, 74, 181

  • household savings allocated to, 127, 129

  • informal lending in the, 134

  • systemic risk, containing, 57

reform

  • benefits of, 27, 36–38, 40f

  • future of, 219–220

  • G-20 countries, lessons to be learned from, 32–36

  • maintaining, reasons for, 29–31

  • sequencing considerations, xi–xii, 30–37, 34

  • without preconditions, effect on stability, 32–36, 38f

reform roadmap

  • capital account opening, 46

  • intermediation channels, 44

  • loan and deposit rate liberalization, 44–46

  • monetary policy framework, 40–43

  • primary elements, 38

  • regulation and supervision, 43

reforms fundamental to stability

  • corporate governance systems, establishing, 13–19

  • domestic markets, deepening of, 19–21

  • interest rate liberalization, 21–23

  • introduction, 3–4

  • long-run, mechanisms for, 24–25

  • renminbi flexibility, 21–23

regulation and supervision

  • capital markets, 175

  • challenges needing to be addressed, 150–152

  • conclusions, 154–155

  • G-20 countries, lessons to be learned from, 34

  • introduction, 5–7

  • paternalistic approach, 146

  • present-day, 148–150

  • roadmap for reform, 43

  • rules-based prudential framework discouraging innovation and change, 146

  • strengthening, CBRC focus on, 141–144

  • Western model, 145–146

regulatory agencies, risk mitigation, 50

renminbi

  • appreciation rate, 182

  • exchange rate, influences on, 22f

  • exchange rate flexibility, 21–23, 34

  • internationalization of, 106–110, 199, 211–215

  • risks from liberalization, 118–119

  • renminbi bonds, 108, 109f

  • renminbi FDI, 108–109

  • renminbi offshore market, 100–101, 108, 112–113, 199

  • repo (collateralized) market, 94–97, 95f, 96f

  • reserve averaging, 84–85, 90–93, 91f

  • residents

    • assets owned by, 167–168, 167f

    • bonds as percentage of investment, 167f

    • employment growth, 30f

    • financial investment by, 167–168

    • household income, increasing, 29, 29f, 32, 38

    • investors, safety net for, 159, 160–161

    • savings allocated to real estate, 127, 129

Revell, Jack, 64

risk assessment, sovereign balance sheet, 74–75

risk awareness campaigns, 144

risk correction, 24

risk management

  • CBRC focus on, 149

  • PBC responsibility for, 49

  • policy recommendations, 151–153

  • roadmap for reform, 42–43

  • Western supervisory model failures post-crisis, 145–146

risk mitigation, 50, 54–57

rule of law, 165

rural financial reform, 15–18, 16f, 17f

Russia, debt-to-GDP ratios, 73

safety net development, 24

Samurai bonds, 196

securities industry, 18, 18–19, 18f, 23–24, 49, 159

Securities Investor Protection Fund, 24

shadow banking system, 55–56, 132–134, 138, 143–144, 151, 158, 181

Shanghai Gold Exchange, 21

Shanghai Interbank Offer Rate (SHIBOR), 21, 23, 91, 97

Small and Medium-Sized Enterprise (SME) Board, 163, 168

small and medium-sized enterprises (SMEs)

  • capital market access, 168–171

  • credit, regulating the supply to, 55–56, 130–131, 133–134, 181, 193

  • policy recommendations, 183

social security fund, 66

Southern Securities, 159

sovereign balance sheet

  • analysis overview, 63–64

  • assets, 49–50, 65–67, 66f, 67f

  • conclusions, 76–77

  • debt level, 71–74, 72f

  • expansion of (2000–10), 73–74

  • historical use of, 64

  • introduction, 63–64

  • items analyzed, 64–70

  • leverage ratio, 71–74, 72t

  • liabilities, 67–69, 67f, 68f

  • mismatch risk assessment, 74–75

  • policy recommendations, 76–77

  • results (sovereign equity/net worth), 67f, 69–70, 69f

stability

  • achieving, components of, 1–2, 50–51, 185–189, 217–219

  • ensuring

    • the future, 7–8

    • Governor of the People’s Bank of China on, 8–9

    • introduction, 1–3

    • macroeconomic factors, 4–5

    • reforms fundamental to, 3–4

    • supervision and regulation, 5–7

  • maintaining, xi, 1, 24–25, 49

  • OMOs and, 82, 85–86, 89, 94

  • policy prioritization, 1

  • promoting

    • agency responsibility for, 49

    • crisis management, 57–59

    • institutional set-up, 59

    • mitigation of risk, 54–57

    • surveillance, 51–54

    • surveillance, shared agency responsibility for, 50

  • reserve averaging for, 84–85, 90–93, 91f

  • state intervention, historically, 49

stability framework, strengthening the

  • crisis management for, 50–51, 57–59

  • institutional set-up, 59

  • mitigation for, 50, 54–57

  • surveillance for, 50, 51–54

standards, international, 23

State Administration of Foreign Exchange (SAFE), 49–50, 197

state-owned enterprises (SOEs)

  • bank funding, 146

  • bankruptcies, 201

  • debts held by, 68, 69

  • economic dominance of, 152–153

  • household savings transfer to, 123, 129

  • lending to, results of, 123, 133, 151, 181

  • liabilities expansion, 74

  • low interest rates, consequences of, 181–182

  • Ministry of Finance shares, 130

  • reform recommendations, 77

  • shadow banking credit risks and, 133, 134

stock market capitalization, 168, 169f

Stock Transfer Agent System, 163

structural liquidity, 80b, 86–88, 87f

structural liquidity surplus, 80b, 85–86, 86f

supervision. See regulation and supervision

surveillance framework

  • developing, challenge of, 52–54

  • financial stability and, 50, 51–54, 57–59

  • systemic linkages, 51–54

systemically important financial institutions (SIFIs), 54–55, 58

systemic risk

  • early warning, data sets providing, 53–54

  • monitoring and managing, PBC role, 157–161

  • policy measures for containing, 57

  • structural liquidity surplus and, 80b

  • surveillance in identifying, 51–54

  • transmission through financial linkages, controlling, 51–52

trade surplus, 74

transparency, recommendations to increase, 23, 183

transparency principle, 165

Treasury bond market, 98–100, 99f, 100f

Twelfth Five-Year Plan

  • income, increasing

    • to households through savings returns, 29

    • minimum wage growth, 181

  • key themes

    • employment growth, 30f

    • increasing consumption, 29f

    • overview, 29

  • objectives, achieving, 2, 219

  • priorities identified, 105

  • reform

    • commitment to, 38

    • roadmap to, 38, 47

Twelfth Five-Year Plan for Financial Industry Development and Reform, 26

United Kingdom, debt ratio, 72

urban infrastructure development, 74

Wen Jiabao, 180, 185, 191

Wenzhou, pilot reform program, 191

World Bank Financial Sector Assessment Program (FSAP), xii–xiii, 25–26, 141–144, 158, 217

World Trade Organization (WTO), 23

Yi, Gang, 64

Zampolli, Fabrizio, 73

Zhu Rongji, 201–203

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