deepening financial system reform to advance chinese modernization
author: lian ping and liu tao
in july 2024, the third plenary session of the 20th central committee of the communist party of china was held in beijing. during this session, the resolution of the central committee of the communist party of china on further deepening reform comprehensively to advance chinese modernization (hereinafter referred to as "resolution") was adopted. the resolution clearly defines the guiding philosophy, overall objectives, and general principles for further deepening reform comprehensively. it emphasizes that "we must pursue coordinated reforms in the fiscal, tax, financial, and other major sectors", and outlines a series of significant deployments for deepening financial system reform.
deepening financial system reform is urgently required to advance chinese modernization
the financial sector is the lifeblood of a nation's economy and a crucial component of a country's core competitiveness. since the 18th national congress of the communist party of china, china's financial sector has experienced a substantial boost in its overall strength under the centralized and unified leadership of the cpc central committee. with a total assets value exceeding 470 trillion yuan, the financial sector has made significant progress in strengthening the real economy and in mitigating financial risks and enhancing financial stability. the financial sector has provided strong support for the country's overall economic and social development, and made important contributions to achieving the goal of building a moderately prosperous society in all respects, and the realization of the first centenary goal on schedule.
in november 2023, the central financial work conference officially set forth the objectives to accelerate the building of a nation with a strong financial sector, comprehensively strengthen financial regulation, improve the financial system, optimize financial services, and effectively forestall and defuse financial risks. china will remain committed to the path of financial development with chinese characteristics and boost the high-quality development of its financial sector to provide strong support for fully building china into a strong country and achieving national rejuvenation through chinese modernization. the resolution calls for deepening financial system reform and outlines important deployments for the next phase of financial reform.
advancing financial system reform in depth is both a breakthrough and a focus for accelerating the transformation and upgrading of china's financial sector. it's also an important pathway to address the prominent issues currently facing china's financial sector. this reform is a critical safeguard for advancing high-quality economic development and is integral to the overall and fundamental aspects of chinese modernization.
deepening the reform of the financial system can speed up the development of a scientific and robust financial regulation system, raise the level of macroeconomic governance, and improve the consistency of macroeconomic policy orientation. a critical metric for assessing macroeconomic governance is the effectiveness of financial regulation. when measured against the objectives of chinese modernization and establishment of a nation with a strong financial sector, the current quality and efficiency of financial services provided to the real economy are inadequate. this inadequacy highlights that the effectiveness of china's financial regulation still falls short of the desired level, particularly in terms of the need for further improvement and refinement of a modern central banking system.
deepening the reform of the financial system serves as both a driving force and a guarantee for strengthening financial regulation. with the rapid development of china's financial sector, the institutional development of financial regulation has gradually become more refined. nevertheless, there remain several issues: regulatory laxity, insufficiency in comprehensive and systematic regulation, lack of authority and deterrence in regulation; insufficient regulatory coverage and penetration, with gaps and blind spots, leaving many risks and hazards in the financial sector; a deficiency in self-regulation, alongside lagging regulatory coordination and legislative efforts. despite significant improvements in financial regulation through relentless efforts in recent years, there is still a need for further enhancement and strengthening.
deepening financial system reform is essential for building a high-quality modern financial system infrastructure. at present, china has emerged as the world's largest banking market and the second largest insurance market. in july 2024, 143 chinese banks were included in the uk’s top 1000 world banks list published by the banker magazine. however, from an objective perspective, the issues of china's financial markets and institutions being large but not strong, and large but not refined, still persist. compared with the world's advanced standards, there are significant gaps in the quality of china's financial products and services, as well as innovation activity. it is imperative that we urgently close these gaps by advancing reforms in the institutional mechanisms of our financial markets, institutions, products, and service systems.
deepening financial system reform is essential for promoting high-quality development of the capital market. the capital market is a crucial component in establishing a high-level socialist market economy in china. its sound development is crucial for accelerating the refinement of the modern market system, optimizing resource allocation, promoting economic transformation and upgrading, and fostering and developing new productive forces. since the 18th national congress of the communist party of china, the central government has placed great emphasis on developing direct financing and the capital market. it has made a series of major decisions and deployments, and has clearly proposed the establishment of a multi-tiered capital market system through deepening reform. this system is intended to have comprehensive financing functions, solid foundational institutions, effective market regulation, and robust protection of investors' legitimate rights and interests. however, for a long time, the development of china's capital market has lagged, characterized by a low proportion of direct financing, an incomplete price discovery function, and a market order that remains insufficiently regulated. investor protection is also inadequate. there is an urgent need to comprehensively deepen capital market reform to better leverage the pivotal role of the capital market, more robustly support scientific and technological innovation, and promote the development of new productive forces.
deepening financial system reform is a key way to promote high-standard opening-up of the financial sector. high-standard opening up of the financial sector is a crucial component of china's opening up and an intrinsic requirement for building a sound modern financial system and achieving high-quality development. in recent years, china has proactively and orderly promoted the opening up of the financial sector. this includes significantly relaxing market access restrictions for financial services and making steady progress in rmb internationalization. in the next stage, deepening the reform of relevant institutional mechanisms will be essential to encourage more medium- and long-term funds, institutional investors, and overseas investors to enter the domestic market and invest in rmb assets.
deepening financial system reform will concentrate on five key priorities
according to the resolution and the forthcoming tasks outlined by the relevant regulatory departments, future efforts to deepen financial system reform will primarily concentrate on the following areas.
enhancing and refining a scientific and robust macro-financial regulation system
maintaining a sound central banking system that enables the smooth transmission of monetary policy is a fundamental priority. this requires strengthening the two-pillar macro-management framework of monetary and macro-prudential policies. furthermore, the integration of market-based interest rate reform into the framework is crucial. to this end, we aim to optimize the interest rate corridor mechanism and refine the market-based mechanisms for the formation, regulation and transmission of interest rates. the target rates outlined in monetary policies will be further simplified, with short-term rates such as the 7-day reverse repo (omo) rate being the primary policy rate. the short-term to long-term transmission mechanism will be gradually streamlined, resulting in a more straightforward, clearer, and smoother interest rate transmission. this improvement will facilitate the transfer of short-term to medium- and long-term rates, and eliminate bottlenecks between the monetary market, credit market, and bond market. we need to deepen the reform of the rmb exchange rate formation mechanism, enhance the flexibility of the exchange rate, steadily make the rmb more market-based, and give play to the role of the exchange rate as an automatic stabilizer for adjusting macro economy and the balance of payments.
establishing a comprehensive and effective financial regulation system
to increase the coverage of regulation, we will bring all financial activities under regulation in accordance with the law, and comprehensively strengthen institutional regulation, behavioral supervision, functional regulation, penetrating supervision and continuous regulation. improving mechanisms for protecting financial consumers and cracking down on illegal financial activities, and establishing a firewall for industrial and financial capital are also important directions for future regulatory reform. the primary focus of deepening regulatory system reform is to clearly define the relationship between national strategies, macro regulation, and financial regulation policies, strengthen regulatory responsibility and accountability systems, and improve regulatory coordination between the central and local levels. the resolution clearly proposes to formulate a financial law, unify the rules and systems for the registration, custody, settlement, and liquidation of the financial market, establish binding constraints for defusing risks at an early stage, and build a robust system to effectively resist and control systemic risks and ensure financial stability. these are important measures to improve financial infrastructure. as a fundamental codified law, the financial law will assume a role and status comparable to that of the civil code in the civil domain. it will fundamentally redefine and adjust financial relationships, contribute to the optimization and improvement of existing financial laws and regulations, comprehensively protect investors' legitimate rights and interests, regulate the behavior of financial markets and institutions, better maintain financial order, and accelerate the building of a modern financial system with chinese characteristics and a nation with a strong financial sector.
enhancing and refining systems of financial markets, institutions, products, and services
first, developing a well-structured financial market system. we will improve a comprehensive and multi-tiered financial market system consisting of banking institutions, bond markets, stock markets, venture capital, and more. it is expected to develop diversified equity financing and accelerate the development of a multi-tiered bond market. additionally, increasing the proportion of direct financing, ensure a balanced ratio between indirect and direct financing, and improve the efficient allocation of financial resources. second, optimizing the financial institution system with a clear division of labor and collaboration. it is supposed to promote a more rational distribution of financial institutions in terms of scale, structure, and regional layout. additionally, improving incentive and restraint mechanisms to better serve the real economy. it is expected to strengthen the leading role of large commercial banks, deepen the reform of policy banks, guide small and medium-sized banks to refocus on their core functions and primary business, improve corporate governance and internal management, support the development of top-tier investment banks and investment institutions, and further enhance the role of insurance industry as an economic "shock absorber" and social "stabilizer". third, enhancing a diverse and specialized system of financial products and services. we will vigorously support the implementation of major national strategies, such as innovation-driven development, coordinated regional development, and food and energy security. it is suggested to develop a financial system for scientific and technological innovation to provide greater support for major national science and technology programs and sci-tech smes.
aiming to develop direct financing and improve financial structure to deepen capital market reform comprehensively
we will refine the robust multi-tiered capital market system, and expand and optimize the cross-border connectivity mechanism of the capital market. it is expected to enhance the legal framework governing the capital market, revise the securities investment fund law and the regulations on the supervision and administration of securities companies, while expediting the formulation of management regulations for listed companies, corporate bonds, and real estate investment trusts, in order to substantially raise the costs of illegal and non-compliant behavior. nurture and expand the force of long-term investments, and refine the foundational systems that facilitate such investments. comprehensively improve the rules governing share reduction, strengthen the supervision of cash dividends by listed companies, develop guidelines for their market value management, and establish a differentiated delisting standard system tailored to different sectors. it is advised to enhance the mechanism for regulating the behavior of major shareholders and actual controllers, and develop a robust system for investor protection. in the next five years, china expects to form an overall framework to support the high-quality development of the capital market. the quality and structure of listed companies will be significantly optimized, and the strength and service capacity of institutions engaged in securities, funds, and futures will continue to be intensified.
promoting high-standard two-way opening up of the financial sector
we will deepen the reform and opening up of the foreign exchange sector, steadily and prudently advance the internationalization of the rmb, develop offshore rmb markets, further enhance the depth and breadth of the foreign exchange market, and orderly promote the convertibility of the rmb under the capital account. also, it is suggested to strengthen shanghai’s competitiveness of as an international financial center and consolidate and enhance hong kong's status as an international financial center.
make steady progress in research and development and application of digital rmb. we will expand the connectivity between domestic and overseas financial markets in a steady and prudent manner. these efforts will make it more convenient for foreign capital to undertake equity and venture investments in china. it is expected to promote the development of a domestic, controllable cross-border payment system and strengthen financial security mechanisms as we open our doors wider to the outside world. it is also advised to establish a unified monitoring and oversight system for all foreign debt. actively participate in international financial governance and international financial regulatory reform. promote and lead the formulation of international rules and standards in emerging fields such as green finance and digital finance enhancing china's influence in the development of global financial standards. we will improve the management model based on pre-establishment national treatment plus a negative list and support qualified foreign capital institutions in participating in our financial service trials.
lian ping is the chief economist at gdd - ccef industry research institute and the chairman of the china chief economist forum
liu tao is senior researcher at gdd - ccef industry research institute
