Third Plenary Session Analysis: Establishing the Basic Law in the Financial Sector (AI Translation)

【周刊提前读】三中全会全解读：金融领域制定“基本法”

The core aspects of financial system reform set forth by the Central Committee of the Communist Party of China include improving the central bank system, enhancing financial institutions' governance, perfecting financial regulation, and optimizing capital market functions to facilitate investment and financing [para. 1].

Wang Jiang, Deputy Director at the Office of the Central Financial Committee, emphasized maintaining the integrity and innovation of reforms, a systematic perspective, and progress through stability. He remarked that financial system reforms cover various aspects from regulation to financial products and services, requiring balanced and connected efforts [para. 1][para. 2].

The guidelines resonate with directives from the Central Financial Work Conference held in October 2023, with some measures already underway. A notable new proposal is the creation of a Financial Law to establish a comprehensive financial legal system. Wang Jiang highlighted the role of this law as foundational within the financial sector, forming a coherent structure with existing regulations [para. 3][para. 4].

A senior financial regulatory official mentioned that the proposed Financial Law will integrate existing single-purpose financial laws and fill regulatory gaps. A working group, including personnel from various regulatory bodies, has been established to discuss this law [para. 3][para. 4].

The "Decision" also calls for enhancing the central banking system and streamlining monetary policy transmission. Governor Pan Gongsheng of the People's Bank of China suggests moving away from quantitative targets towards a market-based interest rate regulation mechanism. Recent policy adjustments include altering the 7-day reverse repo operation rate, which highlights short-term policy rates [para. 5][para. 6][para. 7].

Pan Gongsheng’s statements and recent 10 basis point cuts to Loan Prime Rates (LPR) indicate shifts towards centralizing the 7-day reverse repo rate as the main policy rate, facilitating a smoother transmission from short-term to long-term rates. Future reforms may include further optimizing the LPR mechanism and emphasizing government bond trading to regulate long-term interest rates [para. 8][para. 9][para. 10].

The first proposal for a Financial Law emerged as a hot discussion topic. Wang Jiang and other experts noted that the need for a Financial Law aligns with the recent consolidation of financial regulatory agencies, aimed at unified supervision. Stakeholders argue that the Financial Law should correct overlapping regulations and close gaps while defining the roles and oversight of newly established institutions [para. 11][para. 12][para. 13][para. 14].

Issues addressed include the differentiation between "regular" and "irregular" financial entities, historical regulatory lapses, and the integration of new supervisory bodies. The proposed Financial Law aims to ensure clear regulatory responsibilities and coordinated regulatory practices [para. 11][para. 15].

The "Decision" also outlines enhancing the capital market in terms of asset quality and financing mechanisms. It proposes improving the quality of listed companies, strengthening regulation and delisting systems, and supporting the entry of long-term capital. Recently, the China Securities Regulatory Commission (CSRC) has implemented over 40 supporting rules to align with these proposals [para. 16][para. 17].

On the financing side, ensuring the standardization of regional equity markets and developing multi-tiered bond markets are key goals. For instance, seven regional equity markets have piloted private equity share transfers, marking significant progress [para. 18].

The "Decision" also advocates for the introduction of long-term and patient capital into the market to bolster early-stage and hard technology enterprises. It emphasizes enhancing foreign investment mechanisms and expanding financial market connectivity [para. 19].

To mitigate systemic financial risks and enhance market stability, the CSRC is tasked with improving capital market infrastructure and balancing developmental needs with security concerns, indicating a comprehensive strategy for capital market reforms [para. 20][para. 21].

The initiatives and reforms detailed align with the Third Plenary Session's broader goals, emphasizing structured, systemic changes for advancing Chinese-style modernization and financial stability [para. 21].