Unswervingly fight the tough battle to prevent and resolve financial risks
The 19th National Congress of the Communist Party of China proposed that the decisive victory in building a moderately prosperous society in an all-round way must win three tough battles, one of which is to prevent and resolve major risks. General Secretary Xi Jinping emphatically pointed out that the focus of the battle to prevent and resolve major risks is to prevent and control financial risks. In recent years, under the strong leadership of the Party Central Committee with Comrade Xi Jinping at the core, key progress has been made in the battle to prevent and resolve financial risks. The sudden new crown pneumonia epidemic has severely affected the normal operation of the domestic and international economies, and has added many new financial risks and challenges. However, we have no retreat. We must respond calmly, face difficulties, and strive to achieve a long-term balance of stable growth and risk prevention, so as to provide solid financial support for building a well-off society in all respects.
1. Maintaining financial security is related to the overall economic and social development of our country
General Secretary Xi Jinping pointed out many times that finance is the core of the modern economy and the bloodline of the real economy; finance enables economic activity, financial stability and economic stability; financial security is an important part of national security, and maintaining financial security is related to the overall economic and social development of China A major event of strategic and fundamental nature. It is a great responsibility to do financial work well, and there is no room for negligence.
Finance and risk always go hand in hand. According to the principles of Marxist political economy, financial risk stems from the inherent contradiction of commodities, that is, the unity of opposites between value and use value. After the emergence of currency, the internal contradiction of commodities was externalized into the external contradiction between commodities and currency. The commodity economy is composed of the real economy and the currency economy, which are interdependent and mutually reinforcing; at the same time, they may deviate from each other and conflict with each other. When the production structure is unbalanced or credit deviation is excessive, it will lead to the accumulation of financial risks. After the country was formed, the government intervened in economic activities in many ways. In particular, the conversion of currency from a non-governmental general equivalent to government legal tender, while greatly facilitating production and exchange, is also prone to new huge risks due to government misconduct.
Looking at the world, the rise and weakness of some countries are often closely related to their financial capabilities. In the 17th century, the Netherlands was able to obtain maritime hegemony, and its financial system with modern characteristics played a very important role. Afterwards, the United Kingdom developed a financial revolution, promoted the industrial revolution, and helped it become the so-called "empire that the sun never sets." Similarly, the proliferation of financial risks has led to economic crises and national turmoil. In the 16th century, Spain's aggressive external expansion and accumulation of huge debts eventually triggered a financial crisis and led to a sudden decline in prosperity. The Dutch Tulip Incident in 1637 and the British South Sea Bubble Incident in 1720 both severely damaged the country's economy and national strength.
The "Great Depression" of the 1930s left people in the world with lingering fears. The U.S. stock market plummeted in 1929, and a bank run collapse occurred in 1930, which spread to a global economic crisis and changes in governments in many countries. After the Second World War, severe financial crises occurred in Western countries many times. Under the international financial system dominated by the United States and Europe, developing countries often fall into the unfavorable situation of hot money inflows and high external debt, which has repeatedly induced economic recessions. The lessons of the Latin American debt crisis and the Asian financial crisis of the last century are very profound. Since the beginning of this century, in order to get rid of the economic and social difficulties, the United States and Europe have continuously expanded fiscal expenditures, relaxed the money supply, accumulated huge debts and asset bubbles, and eventually led to a subprime mortgage crisis and a European debt crisis. Since then, the negative impact of the quantitative easing policy has not yet been fully released.
Since the reform and opening up, my country's financial industry has achieved a historic leap and established a modern financial system with its own characteristics. Relying on the leadership of the party and the advantages of the socialist system, we took the initiative to eliminate hidden dangers with the spirit of self-revolution, and successfully defeated the severe inflation in the late 1980s, the economic overheating in the mid-1990s, and multiple external risks, which not only provided relative advantages for China’s economic and social development. A stable financial environment also contributes to world financial stability and development.
After the outbreak of the international financial crisis in 2008, the international economic and financial situation has become more complex and changeable. my country's economic cyclical, structural, and systemic issues have superimposed and met, and the financial risk situation is complex and severe. With the gradual improvement in the balance of payments, the leverage ratios of domestic enterprises, governments, and residential sectors have risen rapidly, financial products and market structures have become increasingly complex, and transparency has become less transparent. The self-circulation of funds in the financial system and the tendency of de-realization to virtuality have intensified. Some illegal financial Groups and illegal financial activities have grown savagely, and corruption and violations of discipline and regulations within the financial system continue to spread. If left alone, it will inevitably lead to systemic risks, produce disruptive effects, and seriously endanger sustained economic development and national political security.
Since the 18th National Congress of the Communist Party of China, facing a very severe risk situation, the Party Central Committee with Comrade Xi Jinping as the core has deep insight, keen judgment, and decisive decision-making. Soon after the end of the 18th National Congress of the Communist Party of China, General Secretary Xi Jinping warned the whole party to attach great importance to hidden risks in the financial sector and firmly hold the bottom line of preventing systemic financial risks. The Central Economic Work Conference at the end of 2016 clearly requested that “prevention and control of financial risks should be placed in a more important position”. In 2017, General Secretary Xi Jinping personally planned and deployed a series of major measures to "prevent risks, eliminate chaos, and make up for shortcomings", and launched an outpost of the battle. General Secretary Xi Jinping’s important exposition on financial work clarified the fundamental strategic issues in the financial field, formed a systematic strategy to prevent and defuse financial risks, and provided us with a fundamental follow-up for our financial work in the new era.
2. Substantial breakthroughs have been made in the battle to prevent and resolve financial risks
In accordance with the decision and deployment of the Party Central Committee, under the advanced command of the State Council and the Financial Stability and Development Committee of the State Council, all regions and departments and the financial system worked together to advance together to prevent and defuse financial risks and achieved significant results.
The blind expansion of financial assets has been fundamentally reversed. From 2017 to 2019, the average annual growth rate of credit funds and bond investment provided by the banking industry to the real economy reached 12.1% and 13.9%, respectively. The average annual growth rate of assets is only 7.7%, less than half of that from 2008 to 2016, which is equivalent to investing an additional 64 trillion yuan in the real economy while reducing the expansion of banking assets by 88 trillion yuan. The aggressive investment and wealth management business of the insurance industry has been curbed, and the proportion of short- and medium-term insurance premiums in the life insurance business has dropped from a historical high of 31% to 4%. The corporate sector's leverage ratio has been steadily declining, while the growth rate of residents and government sector leverage has slowed. The macro leverage ratio reversed the trend of an average annual increase of more than 10 percentage points from 2008 to 2016, and has stabilized at around 250% in the past three years.
Shadow banking risks continue to converge. The hidden risks of shadow banking in my country were once very serious. Shadow banks are nested layer by layer, with hidden risks, and are closely intertwined with real estate bubbles, local hidden debts, and illegal Internet financing. In 2017, we began to focus on rectifying non-standard interbank, wealth management and off-balance sheet businesses. In 2018, the new asset management regulations were implemented. After several years of hard work, it has initially shown a fundamental momentum of improvement. At the end of 2019, the scale of shadow banking dropped by 16 trillion yuan from its historical peak. Interbank wealth management, interbank investment and securities firm asset management were reduced by 87%, 26%, and 42% respectively from their peaks. Entrusted loans, trust loans and various cross-financial investment products continued to shrink. Some international organizations and professional institutions have spoken highly of it, believing that China has made the most significant achievements in reducing shadow banking risks and fundamentally maintained the stability of the financial system.
The identification and disposal of non-performing assets has been greatly advanced. In response to the more common asset quality issues, financial institutions have been inspected and evaluated from multiple angles, and risk assets are strictly required to be carefully classified. Resolutely punish concealing bad assets and crack down on fraudulent accounts. The ratio of loans overdue for more than 90 days to non-performing loans of commercial banks exceeded 128% in 2016 and dropped to 82% at the end of 2019. In three years, the banking industry has disposed of 5.8 trillion yuan of non-performing loans, which is more than the total amount disposed of in the previous eight years. At the same time, accelerating the replenishment of capital and increasing provisions have comprehensively improved the strength of various financial institutions to deal with external shocks.
Illegal and corrupt behaviors are severely punished. Resolutely rectify illegal financial groups and illegal financial activities, and orderly promote asset liquidation, recovery of stolen goods, and risk isolation. Protect legal income, ban illegal income, and deal with problematic shareholders who maliciously manipulate financial institutions in accordance with the law. Taking over the Baoshang Bank in accordance with the law, while fully protecting the interests of depositors, break the rigid payment, promote credit stratification, and strictly enforce market discipline. Dispose of companies with serious violations of laws and regulations such as Anbang Group and Huaxin Group in accordance with the law, and timely reorganize, reorganize, and bankrupt and liquidate several holding companies suspected of handling financial business in violation of regulations. Promote high-risk small and medium-sized banks and trust companies to carry out reforms, reorganizations and risk management under the "one enterprise, one policy" policy. A group of corrupt elements involved in collusion between officials and businesses, transfer of interests, and illegal encroachment have been brought to justice, and some of them are financial management staff who "guard and steal".
Internet financial risks have drastically reduced. At one time, there were a large number of "unlicensed driving" platforms engaging in financial activities illegally, many of which confuse the public under the banner of financial innovation and "Internet +". After centralized rectification, the risk situation in the Internet finance field has improved significantly, and the chaos that "bloomed everywhere" in the past has been rectified. A large number of illegal Internet wealth management, insurance, securities, fund and token institutions have been banned. The number of P2P online lending institutions actually operating across the country dropped from about 5,000 during the peak period to 29 at the end of June 2020. The scale of borrowing and the number of participants have declined for 24 consecutive months.
The debt risks of large and medium-sized enterprises were resolved in an orderly manner. As of the end of 2019, about 20,000 debt committees have been established nationwide, and 1.4 trillion yuan of debt-to-equity swaps have been implemented in a market-oriented and legal manner, helping a large number of companies with development potential to tide over the difficulties. The bond default and stock pledge risks of a large number of companies with difficult liquidity have been mitigated, and a considerable number of "zombie companies" with outdated production capacity or poor management have been cleared out in an orderly manner. Approximately 500 large and medium-sized enterprises have implemented joint credit extension pilot projects, and the endogenous motivation of debt constraints has been significantly enhanced.
The bubble of real estate financialization has been curbed. The real estate bubble is the biggest "gray rhino" threatening financial security. In recent years, various regions and departments have optimized the allocation of financial resources in accordance with the spirit of "housing, housing, no speculation" and "one city, one policy" to prevent illegal capital flowing into the real estate market. Compared with 2016, the growth rate of real estate loans dropped by 12% in 2019, and the proportion of new real estate loans in all new loans dropped by 10%. It not only meets the normal needs of the stable development of the real estate industry, but also avoids greater risks due to excessive concentration of funds.
Preliminary control of hidden debt risks of local governments. Hidden debt is a trigger point for potential financial risks. In recent years, my country has strictly controlled the increase in local government financing and strictly prohibited the provision of financing in violation of laws and regulations. At the same time, the implementation of simultaneous dredging and blocking, the orderly resolution of existing hidden debts, and the financial system actively cooperate with local governments in debt replacement. Promote the sale of local debt to individual investors on the counter of commercial banks, and provide various financial support for statutory new local government debt. In the past three years, bancassurance institutions have accumulated 11 trillion yuan in holdings of local government bonds.
The long-term mechanism of treating both symptoms and root causes is gradually improving. From 2017 to 2019, the regulatory authorities seriously held accountable financial institutions and employees for violations of laws and regulations, penalized 8,818 bancassurance institutions, and 10,713 persons responsible. The total amount of fines and forfeitures was 7.24 billion yuan, more than the sum of the previous decade. Through efforts to make up for shortcomings in the system, supervision work has been further brought into the track of rule of law. Since 2017, a total of 209 banking and insurance industry regulatory rules and regulatory documents have been issued and implemented. The development philosophy and business model of financial institutions that emphasize speed over quality have been corrected to a large extent.
The quality and efficiency of serving the real economy has improved significantly. From 2017 to 2019, RMB loans increased by 46 trillion yuan. Among them, loans for infrastructure, affordable housing projects, and manufacturing industries increased by 8 trillion yuan, 3.3 trillion yuan and 1.6 trillion yuan respectively. The average annual growth rates of scientific research technology, information software, and ecological and environmental protection loans reached 31.2%, 20.8% and 19.5% respectively, which were significantly higher than the average growth rate of loans over the same period. Small and micro enterprise financing has achieved “increased volume, expanded coverage, and reduced prices”. Inclusive small and micro enterprise loans have an average annual growth rate of 23.2%. The coverage rate of basic financial services in poor areas is close to 99%. In 2019, critical illness insurance covered more than 1.1 billion urban and rural residents, and the amount of agricultural insurance risk coverage exceeded 3.8 trillion yuan. Insurance compensation has become an important source of funds for recovery and reconstruction after various natural disasters.
After continuous efforts, financial risks tend to converge, and the resilience of the financial system has increased significantly. Not only succeeded in avoiding the evolution of hidden risks to the financial crisis, but also created valuable policy space and room for maneuver to deal with various complex situations. Practice has proved that the Party Central Committee’s decision and deployment on preventing and deflating financial risks are completely correct and timely. If the fighters were delayed and the remediation was delayed, the current difficulties would be much greater, and the adverse consequences would be incalculable.
3. New major challenges in the financial sector after the outbreak of the new crown pneumonia epidemic
my country's economy is in a critical period of turning to high-quality development. It is already facing many difficulties such as accelerating aging, declining savings rate, and increasing resource and environmental constraints. The unprecedented epidemic in a century directly caused a deep decline in growth in the first quarter. Although positive growth was restored in the second quarter, there are still many uncertainties in the near and mid-term development. The Global Economic Outlook released by the World Bank in June predicted that the global economy will contract by 5.2% in 2020. For a period of time to come, my country's economic supply and demand ends, both domestic and foreign markets are under pressure at the same time, and the financial system is bound to encounter great difficulties.
In order to contain the recession, when economic activity shrinks sharply, financial activity must instead expand. The original control target was that the growth rate of broad money and social financing was slightly higher than the growth rate of nominal GDP, and was more than 10 percentage points higher in the first half of this year. It is expected that the overall leverage ratio and sub-sector leverage ratio will rebound significantly this year, and the bad debts of financial institutions may increase substantially. In 2019, the banking industry newly formed 2.7 trillion yuan of non-performing loans. After the "black swan" of the epidemic, it is inevitable that asset quality will double and deteriorate. Due to the time lag in the financial and financial response, the current asset classification has not accurately reflected the true risks, and the bank's spot book profits have a large inflated component. This situation will not last forever, and non-performing assets will be exposed gradually.
In the context of the rapid development of economic globalization for many years, the economic and financial interdependence of various countries has reached a high level. However, it is regrettable that the current atmosphere of international cooperation is not ideal. In recent years, the economic structure of a small number of developed countries has continued to deteriorate, leading to the tearing and confrontation of social classes, the increasing extremism and populism, the prevalence of trade protectionism, the increase in "retirement", "decoupling" and "broken links", and China has openly adopted a strategy of suppression and containment. After the outbreak of the epidemic, some countries have failed to cope with them, but they have transferred contradictions to the outside world in various ways. The United States includes companies and institutions in China and some other countries on the "entity list" and frequently causes troubles. These practices jeopardize normal economic and trade cooperation, the global economic recovery has added more variables, and financial stability and financial security have been disrupted.
A series of macro hedging policies adopted in response to the epidemic is very necessary, and further efforts may be intensified in case of new abnormalities in the implementation. However, we cannot help but see that under the background of loose funding, companies, residents, and governments may all increase debt. After the expectation of consistent downward interest rates is strengthened, it is likely to encourage leveraged trading and speculation, and spawn a new round of asset bubbles. Real estate prices in some places have begun to rebound, and financial resources may once again be concentrated in high-risk areas. Borrowers with poor credit may use preferential policies such as deferred repayments to maliciously escape debts, and high-risk shadow banks with complex structures are also likely to make a comeback.
At present, many countries in the world, especially the most developed countries, have adopted strong stimulus measures. Some countries implement unlimited quantitative easing policies, with both fiscal and monetary measures, releasing a large amount of liquidity to the market, and directly financing or providing guarantees to individuals and companies. In the short term, this approach is conducive to stabilizing the economy and finance, but the mid- to long-term effect is very uncertain. There is no free lunch in the world, and there is no permanent banquet in the world. In an international monetary system dominated by the US dollar, the unprecedented unlimited quantitative easing policy of the US actually consumes the credit of the US dollar, erodes the foundation of global financial stability, and will have unimaginable negative effects. Emerging economies may face multiple pressures such as imported inflation, shrinking foreign currency assets, exchange rate and capital market volatility. More serious is that the world may once again be on the verge of a global financial crisis.
In addition, the rapid development of financial technology in recent years has brought us many opportunities as well as great challenges. my country's financial technology ranks among the top in the world in some areas, and there is no existing experience in risk prevention and control to learn from. Due to the widespread application of high-tech such as big data, cloud computing, and artificial intelligence, the manifestations of traditional financial risks and the path of infection have undergone profound changes, and non-traditional risks such as data security have become increasingly prominent. These risks have strong suddenness, concealment and destructive power, and we cannot but arouse our high vigilance.
4. The financial system must strive to ensure that economic and social development goals are achieved on schedule
Faced with the complex and severe economic situation, the Party Central Committee with Comrade Xi Jinping at the core made arrangements for the next phase of work in a timely manner. We must effectively enhance the awareness of opportunities and risks. We must "stabilize the overall situation and coordinate as a whole", further improve the quality and efficiency of financial services, and promote economic development as soon as possible. We must also "classify policies and accurately dispose of bombs" to deal with them in an orderly manner. Highlight risks in key areas and achieve a long-term balance between stable growth and risk prevention. From the current stage, it is particularly important to do the following tasks.
Fully promote the return of the national economy to a normal cycle. Finance and the real economy coexist and prosper together. Serving the real economy is the bounden duty and purpose of finance, and it is also a fundamental measure to prevent financial risks. As the saying goes, "Agricultural, industrial and commercial transactions are accessible, and turtle money is prosperous." The current priority is to fully restore the industrial cycle, market cycle, and economic and social cycle under the premise of strictly preventing and controlling the rebound of the epidemic. It is necessary to closely follow the tasks of "six stability" and "six guarantees", make full use of favorable conditions such as my country's large market potential, abundant savings resources, and wide scope of international cooperation, and give full play to the enthusiasm and initiative of the central and local units. Strengthen the coordination and coordination of fiscal, financial, employment, and industrial policies, especially to serve various market entities such as small, medium and micro enterprises, open up production, distribution, circulation, and consumption links, and promote the formation of a domestic cycle as the main body and a domestic and international dual cycle. New development pattern promoted.
Speed up structural reforms on the financial supply side. Finance is the core and blood of the modern economy, and an important tool for resource allocation and macro-control. When the finance is done well, the whole game will be alive with one move. In the structural reform of the economic supply side, the structural reform of the financial supply side plays the role of "goss eye". We must adhere to the direction of socialist market economy reform and accelerate the transformation of the financial industry development mode. Promote the adaptation of the financial structure to economic and social development, promote financing facilitation, reduce the cost of the real economy, and improve the efficiency of resource allocation. Improve the corporate governance of financial institutions and correct the two negative tendencies of major shareholder manipulation and insider control. Continuously improve the basic system of the capital market, and guide financial management, trust and insurance to increase long-term stable funds for the capital market. Speed up the construction of the second and third pillars of pension insurance, and promote the proportion of pension funds in the capital market to reach the world average level.
Dispose of non-performing assets as early as possible. Credit risk is the most fundamental risk in the financial industry. Toxic assets are lesions that must be removed with determination. Covering up delays will only delay treatment and ultimately bring serious consequences. Financial institutions should adopt a more prudent financial and accounting system, do a solid asset classification, and fully expose non-performing assets. In daily supervision, it is not easy to judge the increase in the defective rate. It is necessary to use the financial space vacated by the downward adjustment of provisions to increase the disposal of non-performing assets. Formulate realistic income and profit plans, increase provisioning and capital replenishment. Clearing the policy blocking points for the disposal of non-performing assets will create more favorable conditions for improving the robustness of the financial system.
Prevent high-risk shadow banks from rebounding. The risk of shadow banking is "low ignition point" and "high intensity". If there is a turmoil, it may form a "fire prairie situation" and cause endless harm. At present, shadow banking has undergone unremitting governance and risks have been controlled to a certain extent, but the soil for survival has not been completely eradicated. A slight deregulation may lead to a full resurgence and abandon all previous efforts. It is necessary to maintain strategic determination and maintain high pressure on high-risk businesses. Highlight the principle of simplicity and transparency, standardize cross-financial products, achieve a clear boundary between public offerings and private offerings, isolation of on-balance sheet and off-balance sheet business risks, separate account management for entrusted and self-operated businesses, and a clear distinction between savings products and investment products. Strive to achieve a clear and orderly division of responsibilities for the stock market, bond market, credit market and money market. At the same time, continue to rectify Internet financial risks, and severely crack down on illegal financial activities such as illegal fund-raising.
Deal with different types of institutional risks in a timely manner. Targeting institutions with different risks, accurately and effectively implement policies. High-risk financial groups shall be dealt with in accordance with established plans and division of labor in accordance with laws and regulations. For rural financial institutions, we insist on the overall stability of county legal person status and encourage the use of multiple methods to supplement capital and introduce strategic investors. For local corporate institutions such as city commercial banks and trusts, provincial governments are supported to formulate and implement disposal plans, and financial management departments strengthen professional guidance. Promptly study and put forward the list of domestic systemically important banks, and organize the formulation of recovery and disposal plans for the financial institutions on the list. It is necessary to establish an efficient risk management mechanism for problematic institutions. Financial institutions perform their main responsibilities, and shareholders, especially major shareholders, must bear important responsibilities. The local party committee and government fulfilling territorial responsibilities must closely integrate the implementation of the leadership responsibilities of the local party, the management responsibilities of local state-owned financial capital, the responsibilities of managing risks in the jurisdiction, and the responsibilities of maintaining social stability. The financial management department performs the responsibility of the supervisory entity. Improve the deposit insurance system and institutional system, and give full play to the role of early intervention, early warning, and early disposal.
Steadily expand the opening up of the financial industry. In accordance with the policy of autonomy, orderliness, equality, and security, while ensuring financial sovereignty, we will strive to achieve a higher level of financial openness. Accelerate the establishment of an open, transparent, stable and predictable regulatory policy environment, encourage Chinese and foreign financial institutions to compete on an equal footing, deepen cooperation, learn from each other, and promote innovation. Improve the ability of macro financial management and risk prevention and control under open conditions, timely detect and effectively prevent the spread of external shocks to the country. Actively participate in the formulation of international financial governance and regulatory rules, strengthen international coordination of macro policies, and enhance international discourse power.
Effectively strengthen the education and protection of financial consumers. Strengthen the popularization of financial knowledge so that both urban and rural residents understand that investment is risky. There is no financial product with high return and low risk in the world, and there is no so-called "stable profit without loss" financial management project. Propagating that "guarantee high return" is financial fraud . Institutional and individual investors must establish value investment, rational investment and risk prevention awareness. Promote the spirit of contract, strengthen the awareness of the rule of law, adhere to the law, and increase the cost of violations. Simplify product structure, strict customer stratification, and report risks truthfully. Strengthen information disclosure and improve market transparency. Speed up the construction of the social credit system, further improve the joint punishment mechanism for dishonesty, and promptly correct all kinds of violations of laws and regulations that mislead financial consumers.
Further strengthen the party's leadership over financial work. The most fundamental thing to do well in financial work is to uphold the party's centralized and unified leadership. This is our greatest institutional advantage. From our work practice in recent years, we have seen that a series of risk incidents and corruption cases in the financial sector are mainly due to the severe weakening and lack of party leadership and party building. In recent years, the experience of removing financial risk points has shown that strengthening the party’s leadership is the most fundamental and effective measure. In principle, all financial institutions that implement risk management and reorganization must establish temporary party organizations. For risk institutions with complex equity relationships, the party’s leadership responsibilities should first be consolidated. We must severely crack down on financial corruption, resolutely investigate and punish the collusion of interests behind the risks, and organically integrate the investigation of cases, prevention and control of risks, recovery of losses, plugging loopholes, and reshaping of culture, and accelerate the construction of a long-term mechanism for the healthy development of the financial industry.
Author: 中国人民银行 Party Secretary, Chairman of the China Insurance Regulatory Commission, Bank Guo Shuqing