In Depth: China’s Ambition to Build a Financial Powerhouse

10 Nov 2023

By Ding Feng, Wu Xiaomeng, Zhang Yuzhe and Denise Jia

China for the first time set a goal to “accelerate building a financial powerhouse” and put the Communist Party in charge of achieving it last week at the government’s twice-a-decade Central Financial Work Conference.

In the sixth such financial meeting since 1997, the conference emphasized that finance is the lifeblood of the national economy and the key to the country’s core competitiveness. Each of the past five meetings focused on different issues and tasks, reflecting shifting challenges faced by China’s financial system.

Led by President Xi Jinping, the conference took place amid slowing economic growth, a protracted property industry slump, beaten-down stock markets and mounting local government debt. For the first time, there was considerable discussion of the real estate sector. The property slump has hit China’s stock markets hard. The CSI 300 index plunged to a 4.5-year low Oct. 24. The index has declined about 10% this year after a series of measures to prop up the market fell short.

Luo Zhiheng, chief macroeconomic analyst of Yuekai Securities, said the theme of this year’s meeting could be described as “strengthened regulation, risk prevention and growth promotion under the Communist Party’s leadership over the financial sector.”

Communist Party’s role

China said it will strengthen the Communist Party’s “centralized and unified” leadership over the financial sector, which is the “fundamental guarantee” to all financial work. The name of the conference was changed to Central Financial Work Conference from National Financial Work Conference to signal the ruling party’s increased oversight of finance, several senior financial industry participants said.

The Central Financial Commission (CFC), which was set up in March to lead financial work under the direct supervision of the Communist Party’s central committee, should lead overall planning and coordination, the conference said. In addition the Central Financial Work Commission (CFWC) should focus on party building in the financial system, and local branches of the CFC and CFWC should carry out similar responsibilities, the meeting said.

The CFC absorbed the Financial Stability and Development Committee, a body set up under the State Council in 2017 to coordinate financial supervision and regulation among the central bank and other financial watchdogs. The establishment of the CFC indicates that the former committee didn’t do enough in planning and coordination to prevent financial risks, a financial regulator said.

In the past, local governments usually took the main responsibility for dealing with local financial risks, but provincial financial regulators often felt that they didn’t have enough authority. Provincial branches of the central bank and the provincial financial regulation bureaus, equivalent on an administrative level, often couldn’t decide which should take the lead in decision-making, a local financial regulation bureau chief told Caixin.

According to the financial work conference, local governments will set up provincial and municipal offices of the CFC and the CFWC, clarifying their authority over financial oversight at the local level, a senior financial regulator in Shanghai said.

Tech Financing

A key topic of this year’s conference was how finance should serve the real economy. The meeting called for more financing to promote scientific and technological innovation, advanced manufacturing, green development and micro, small and medium-sized enterprises.

Support for small and medium-sized tech enterprises was mentioned in the 2002 financial work conference but not in the following meetings. This year, science and tech were placed at the top of financing priorities.

Many banks lack incentives and capacity for serving small and medium-sized tech enterprises, an executive at a medium-sized bank told Caixin. Most tech startups mainly rely on venture capital and the capital market to raise funds, while lending from commercial banks is only “icing on the cake,” the executive said.

In practice, to make tech financing data look better, banks use some “tricks” such as classification of a loan to a state-owned enterprise that uses the funds to buy products or services from tech companies as tech financing, or inflating tech loan numbers by including loans to companies that are remotely related to the tech sector, the executive said.

The high-risk nature of tech startups and lack of traditional collateral usually create risk control pressure for banks in lending to tech companies, said Wang Tianyu, former chairman of Commercial Bank Co Ltd. of Zhengzhou.

Initial loans to tech startups are like gambling, the executive said. “If you win, you only earn some interest income,” he said. “But if you lose, you may lose all your principal.” The risks and returns don’t match up if banks provide loans to such companies, he said.

Support for property sector

The main financial risks China faces come from local government debts, the property sector and small and medium-sized financial institutions, Luo said.

The leadership cited some high-profile cases at the meeting, such as the Henan village banks’ multibillion-dollar scam, China Evergrande Group’s debt failure and Chinese aluminum giant Zhongwang Group’s bankruptcy.

The conference said there will be efforts to improve regulation of property developers and their access to funding. The plans outlined called for equal treatment of all developers, whether they are state-owned or private, in meeting reasonable financing needs.

Each city should implement housing policies suitable to its own situation and take full advantage of policies to support housing demand, accelerate the construction of affordable housing and build a new model of real estate development, according to the meeting readout.

The construction of affordable housing, renovation of urban villages and construction of infrastructure projects can not only offset the decline of property investment but also improve people’s living conditions, Luo said.

China’s property market plunged into a liquidity crisis in 2021 after the central government launched a deleveraging campaign targeting overindebted developers. The policy contributed to a slump in housing sales, and prices fell as confidence sagged.

Now the crisis has hit some of the nation’s largest developers, such as Country Garden Holdings Co., despite a string of measures to ease the crunch. Some developers have defaulted on billions of dollars of offshore bonds. Many developers have left behind unfinished projects with limited access to financing.

China will deepen and consolidate the registration system for stock issuance, develop diversified equity financing and vigorously improve the quality of publicly traded companies, the meeting said.

Local government debts

Policymakers have become increasingly concerned with the risks posed by local governments’ off-balance sheet borrowings after years of costly Covid controls and the prolonged property crisis.

China said at the meeting that it will set up a system to resolve local government debt risks and build a mechanism to manage government debt that supports high-quality economic growth.

The last meeting in 2017 told local governments to resolve their hidden debt within five to 10 years, and no new hidden debt was to be allowed thereafter. At this year’s meeting, the debt issue was expanded from hidden debt to all local debt, indicating the leadership’s determination to resolve the entire local debt problem, including the liabilities of local government financing vehicles (LGFVs) such as bank loans, publicly issued bonds and debts owed to businesses, analysts said.

The meeting also called for optimization of the debt structure of the central and local governments. Currently, local governments account for a larger share of China’s government debt than the central government, and their borrowing costs are higher.

Local government debts amount to 80% of China’s total government debt, according to Zhang Ming, deputy director of the Institute of Finance & Banking under the Chinese Academy of Social Science. Ten-year bonds issued by the Finance Ministry carry an interest rate of 2.5% to 2.6%, while local debt of similar maturity pays an average interest rate of 6%. LGFVs from smaller cities could pay double-digital interest rates, Zhang said.

Some scholars urged the central government to help alleviate local governments’ debt burden by increasing its own borrowing. China is already doing so. An Oct. 24 meeting of the Standing Committee of the National People’s Congress, the parliament that oversees government borrowing, approved a 1 trillion yuan ($137 billion) special bond. The funds will be allocated to local governments.

Financing infrastructure investment through sovereign debt issuance may reflect a shift in China’s policy thinking by putting more of the fiscal burden on the central government rather than local authorities, which are running out of room to borrow, analysts said.