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Editorial: Strengthened Central Bank Continues to Spearhead Financial Reform

China’s annual legislative session ended recently, and institutional reform and personnel appointments are now closely watched topics.

Yi Gang was appointed the new governor of the People’s Bank of China (PBOC), marking the end of Zhou Xiaochuan’s 15-year tenure. The decision-makers made across-the-board considerations when appointing central bank and financial regulatory personnel. Their existing and forthcoming arrangements will contribute to the continuation of the central bank’s various policies.

For many years, the central bank has been the active driver of financial reform. Now the public is placing high hopes on a central bank that shoulders more responsibilities, hoping that it continues to play the role of reform’s bellwether, and hoping that, after reforms, the financial regulatory system will soon fall into place, realizing the original intention of reform.

Only in the era of reform and opening up, hasthe People’s Bank of China truly become a “central” bank. During China’s switch from a planned economy to a market economy, from isolation to openness, the central bank played an important role. At the moment, as the Chinese economy switches from high growth to high-quality growth, China’s financial market and its regulators must discard old practices and introduce new ones that fit the changing reality.

Finance is the heart of today’s market economy, so any reform in the financial market will inevitably send shock waves through the entire system. China has already established the principle of “letting the market play a decisive role in allocating resources, and letting the government play its functions better” — a principle proposed in a 2013 leadership meeting — but the path and sequence of realizing the principle must still be explored. The new central bank governor will find his courage and wisdom tested by the problem of how the financial sector will continue to promote wide-ranging deepening of reforms.

For many years, the central bank has had great accomplishments, receiving high recognition both at home and abroad. This is foremost the result of major national policies of internal reform and opening-up to the outside world. It is the result of strong leadership in the policymaking levels. At the same time, the contributions of Zhou Xiaochuan, governor of the central bank, must be noted. He had a deep understanding of China’s national sentiment and the workings of its systems, and had a sharp mind, pragmatism, flexibility, and familiarity with modern economic theory, making him an important proponent of overall coordinated reform. He led the central bank to push for reform of China’s banking industry, the marketization of the exchange rate and interest rate, the internationalization of the yuan, and deeper opening-up of the financial market in a determined and timely manner. Zhou helped to create a good monetary and financial environment for the Chinese economy to maintain its high growth rate.

Nowadays, China’s state-owned banks, previously viewed as “technically bankrupt,” have become a critical force in the global financial sector. A multilayered financial market is taking shape, and interest-rate marketization is already complete, at least formally. After a complicated process, exchange rate marketization is finally achieving breakthroughs, becoming more determined by the market, while the bidirectional exchange-rate mechanism is in its initial stages of formation, and routine interference by the central bank is being phased out. There has also been steady progress in terms of internationalizing the yuan, opening up capital projects, and opening up the financial market. Alongside these reforms, the monetary policy toolkit is being enriched day by day, and the central bank can look forward to greater achievements in the reform and opening-up of the financial sector.

However, at the moment China’s central bank still faces many challenges, including many unfinished reform projects. Even if we focus on the previously mentioned reforms, which have made substantial progress, the transmission of monetary policy still needs to be more unobstructed, while China is still in the process of constructing an interest rate corridor and creating a smooth national debt earnings yield curve. The reform of the mechanism determining exchange rate marketization also needs to be deepened. How finance authorities should better serve the real economy is an even greater unsolved problem. The Chinese government has said multiple times that it will unveil substantive actions this year to broaden the opening-up of the financial sector. The central bank is bound by duty to continue opening up new paths for financial reform in the future.

Preventing and resolving financial risks are the urgent tasks faced by the central bank. This has been included on the list of the next three years’ “three big battles.” The 19th Party Congress report called for a robust financial regulatory system, guarding the bottom line of having no systematic financial risk. The State Council’s financial stability and development committee is located in the central bank. According to the State Council’s latest institutional reform plan, a banking and insurance supervision committee will be set up, transferring onto the central bank responsibilities for drawing up important rules governing the banking and insurance industries, as well as the responsibility for determining a prudent oversight system. This means the central bank is taking on greater responsibility to prevent and resolve major financial risk. The central bank’s new chief now faces the test of controlling the currency floodgates and coordinating macro-prudential and micro-prudential measures.

Deepening reform and increasing opening-up in China’s financial sector doesn’t depend only on the central bank. It also requires coordination with other regulatory bodies. Broader and deeper comprehensive reforms are even more essential, requiring breakthroughs in state-owned enterprise reform and in breaking monopolies. To promoting the construction of a unified, orderly, and fair competitive market, we must energetically build a country that abides by the rule of law, and improve the business environment, among other tasks. It is acceptable for the financial sector to lead the pack when it comes to reforms. But if some other areas significantly lag behind, this will ultimately hinder financial reform.

As the U.S. Federal Reserve accelerates its interest rate hikes, and developed economies’ monetary policies further normalize, the PBOC’s monetary policymaking space will be squeezed, increasing the difficulty of implementing monetary policy. And as the world economy recovers and global capital flows accelerate, China faces many challenges in opening up its financial market. Big data, blockchain and other new technologies will also raise unprecedented issues. For many years, the PBOC has been known for its international outlook and strong research practices. The public hopes that it will maintain and increase this mentality and style.

On the 40th anniversary of China’s opening-up, people are paying close attention to the new moves in China’s financial sector to deepen reform and expand opening-up. Decision-makers are placing a lot of emphasis to financial work, assigning strong leaders for the central bank and the newly formed financial regulation department. China’s central bank is preparing advantageous conditions and continuing to serve as a bellwether for financial reform, continuing to break new ground and fulfilling its mission.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)


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