Opinion: Five Takeaways From China’s Central Financial Work Conference by Zhong Zhengsheng

13 Nov 2023

Earlier this week, China’s twice-a-decade Central Financial Work Conference (previously known as the National Financial Work Conference) took place in Beijing, where officials discussed the country’s priorities for the financial sphere over the next five years. There are five topics from the meeting to focus on.

Real economy

The conference emphasized that “high-quality development is the primary task in comprehensively building a modern socialist country, and the financial sector must provide high-quality services for economic and social development.” This entails:

– Creating a favorable monetary policy environment

– Optimizing the structure of fund supply (allocating more funds to technological innovation, advanced manufacturing, green development, as well as micro and small enterprises)

– Optimizing the financing structure (with a focus on the stock market)

– Improving institutional positioning (strengthening large state-owned institutions, and imposing strict entry criteria for small and midsize institutions)

– Enhancing market rules

– Strengthening corporate governance

– Advancing the high-level opening of the financial sector while ensuring national financial and economic security

Real estate

To establish a virtuous cycle between finance and real estate, the conference proposed improving the regulatory system for real estate companies and their fund management, improving macro-prudential management of real estate finance, and equally meeting the reasonable financing needs of developers of different ownerships.

Specific measures may include rolling back excessive regulation, guiding financial institutions to provide more financing support for private developers’ high-quality projects, and investing in urban village renovations and affordable housing to ensure livelihoods while stabilizing real estate investments.

Local government debt

The conference said that “it is imperative to put in place a long-term mechanism on handling local government debt risks and a government debt management mechanism suited for high-quality development, and optimize the structure of central and local government debts.”

In my opinion, “a long-term mechanism on handling local government debt risks” covers not only localities’ “implicit debt,” but also their “explicit debt.” With the growing scale of special-purpose bonds (SPBs), some local governments are approaching the red line where annual SPB interest payments exceed 10% of their government-managed fund expenditure. Crossing the line will trigger fiscal restructuring.

The long-term mechanism should be able to restrain the growth of implicit debt while encouraging local governments to use other fiscal resources to stabilize economic growth.

Adjusting the allocation of fiscal powers and responsibilities between the central and local governments should also be considered. This includes increasing the central government’s share of public budget expenditure, and raising the share of local government tax revenues, especially those from value-added tax and consumption tax.

Risks from financial institutions

The conference emphasized “risks in small and medium-sized financial institutions should be addressed without delay.”

Small and midsize banks are a weak link in the banking system, characterized by issues like inadequate corporate governance, weak internal control systems, poor risk controls, and varying qualifications of shareholders.

Risks in small and midsize banks concern the protection of depositors’ interests and social stability. Contagion could trigger regional financial risks, impacting China’s financial and credit system.

Capital markets

The concept of stimulating capital markets was mentioned again at the conference. This can have three macro-level implications:

– Capital markets have unique advantages in optimizing the supply of funds and improving the efficiency of fund use. Direct financing can provide strong support for emerging industries.

– Stimulating capital markets can help increase residents’ property-generated income, such as rental income and capital gains. In 2022, Chinese households’ property income accounted for only 8.7% of their disposable income, which is lower than the levels in major developed countries like the U.S., Canada, the U.K., Germany and Australia. In recent years, Chinese residents have concentrated their asset allocation on the real estate sector. Stimulating capital markets can help them optimize their asset allocation.

– Stimulating capital markets can help diversify and mitigate systemic financial risks. After the 2008 global financial crisis, risks in China’s financial assets increasingly concentrated in the banking sector. Capital markets, through expanding equity financing, can alleviate high debt risks.