On October 30 and 31, the central financial work conference was held in Beijing, with Chinese President Xi Jinping delivering a key speech on developing China into a world’s financial power. Held generally every five years since 1997, the central financial work conference serves as a platform to set the direction of China’s financial policymaking. Coming at a time of economic woes and financial risks both within China and abroad, this year’s conference was closely watched.
Stressing the significant role of the financial system in supporting overall economic and social development, the conference for the first time emphasized the central leadership of the Communist Party of China Central Committee in financial work. It signaled that the overall focus of China’s financial policy in the coming period is on strengthening financial supervision and the prevention and resolution of financial risks.
The conference specifically addressed the major financial challenges China currently faces, including a tumbling real estate sector, high local government debt, the fluctuation of the yuan exchange rate, and a weak stock market.
First, the conference emphasized the importance of “timely handling the risks of small and medium-sized financial institutions.” It sends a clear message that against a backdrop of financial crises faced by many small- and medium-sized financial institutions in the past months, these institutions in both the banking and non-banking sectors will be subject to stricter supervision.
Second, the conference stressed the need to “establish an effective mechanism for preventing and resolving local government debt risks and establish a government debt management mechanism.” It means that the “comprehensive debt-reduction plan” already proposed at the Political Bureau meeting in July is entering the implementation stage that will restrain local governments from taking on new debt.
Third, the conference pledged to “improve the supervision system and capital supervision of real estate enterprises.” In the coming months, authorities will conduct “penetrative regulation,” which will focus on the inspection of funding flows of all enterprises and projects through the whole property development process, as well as capital flows between real estate enterprises and related companies in both upstream and downstream industries. This will prevent the financial risk of real estate enterprises from spreading to other industries and regions.
The conference also proposed improving the macroprudential management of real estate financing to accelerate the construction of affordable housing, urban village transformation and rental housing projects, so the overall policy environment for the real estate sector will remain friendly.
Fourth, the conference stressed the necessity to regulate the operation of financial markets by “standardizing the issuance and trading behavior of the financial market” and highlighted the necessity of “preventing cross-regional, cross-market, and cross-border transmission of financial risks.” It signals that authorities will adopt a more interventionist approach regarding trading behaviors that are deemed to cause disruptive market fluctuations or market expectations.
Finally, the conference committed to “strengthening foreign exchange market management” and to maintaining the overall stability of the exchange rate of the yuan “at a reasonable and equilibrium level.” We can expect the foreign exchange market will be subject to a stringent regulatory environment and that authorities will not hesitate to take measures to stabilize the market if there are major fluctuations in the exchange rate and in cross-border capital inflows and outflows.
In the face of internal and external financial risks, strict regulation and risk prevention will continue to be the primary focus of China’s financial policy agenda in the coming period.
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