Opening Remarks by Guo Shuqing at the 11th Lujiazui Forum


June 13, 2019


Vice Premier Liu He, Party Secretary Li Qiang, CSFB President Zhou Xiaochuan, Deputy Secretary General Xuedong, Mayor Ying Yong, PBOC Governor Yi Gang, CSRC Chairman Yi Huiman, ladies, gentlemen and friends:


Good morning.


As the rotating co-Chairperson of this forum, and on behalf of the host, I would like to extend a warm welcome to all friends, old and new. The annual Lujiazui Forum has been successfully held for ten years. We are delighted to see the development of Shanghai International Financial Center has been accelerated, with remarkable achievements. The financial authorities will continue to support Shanghai’s reform and opening up. We will spare no effort in providing whatever support so long as we are able to. Yesterday, the leaders of Shanghai criticized me for coming to Shanghai only occasionally, which is, unfortunately, true. However, as long as Vice Premier Liu approves, I will move my office to Pudong tomorrow.


At present, the robust China’s financial system has provided a strong underpinning for comprehensively deepening reforms and high-quality economic growth. Under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core and following the general planning of the Financial Stability and Development Committee under the State Council, the financial industry is proactively implementing new development concepts, vigorously promoting supply-side structural reforms, continuously optimizing the institutional system, market system and product system, and striving to provide better and more efficient financial services for the real economy and for the people. In this process, we need to stress on the following aspects:


First, we must hold fast to the customer-centered business philosophy. In 1978, China’s total financial assets were less than RMB 200 billion and the supply of financial products was extremely scarce. Today, the total financial assets have exceeded RMB 400 trillion. There are, however, much room for financial institutions to improve customer services and market segmentation. Fifteen years ago, when we started the shareholding reform of large state-owned banks, we felt that the biggest challenge was to eliminate the bureaucracy. In 2005, several experts from the Bank of America came to help us with the restructuring of banking outlets. For several weeks in a row, they paid visits to a single savings office, having conversations with every customer and recording every detail of the customers transactions at the bank. Our colleagues were puzzled. Some even laughed that the Americans were stupid and stubborn. Later, when the experts put forward accurate analysis report, the Chinese colleagues were amazed. Subsequently, our colleagues not only consulted the experts, but also began to think about how to make improvements. The banks’ business processes were approaching “Six Sigma”, with the productivity eventually getting close to or even exceeding that of top-notch international banks. Today, with the help of the internet, artificial intelligence, big data and other information technologies, financial institutions in China have been seeing revolutionary changes in their technological capabilities. Their speed of product development is getting increasingly close to that of advanced international peers. However, it is of paramount importance to give top priority to customers’ interests and concerns, if we are to provide high-quality financial services and become a world financial center.


Second, efforts should be made to develop more specialized and personalized financial institutions. There are more than 5,000 licensed financial institutions in China and tens of thousands of non-licensed institutions engaged in quasi-financial activities. Compared with developed countries, banking penetration rate, insurance depth and density and capital market influence in China are still at a very low level. There are limited types of financial institutions. They are inappropriately deployed and have no distinctive features. “Excessive competition” and “no access to financial services” co-exist. With the emergence of financial technologies, it is impossible to simply repeat the path of other countries in terms of business model, profitability model and corporate structure. It is necessary to improve the capacity of financial institutions in terms of quantity and quality. We should support medium- and small-sized institutions serving communities and micro and small enterprise (MSEs) and encourage and promote the financial services provision at the grassroot level. We should support financial firms that develop their own expertise and focused in specific fields and encourage them to develop a distinctive corporate culture commensurate with their principal activities. We should support all kinds of financial institutions to integrate offline and online activities and combine traditional and modern features. In this process, we warmly welcome the participation of overseas financial institutions. We will further expand the opening of the banking, insurance, securities and trust sectors. In particular, we welcome experienced asset management institutions to work with the Chinese counterparts to raise RMB funds for investing in the RMB-denominated securities market.


Third, the financial system should better adapt to the life cycle of businesses. Enterprises at different stages of life cycle have different financing needs of different nature and characteristics. Venture capital is suitable for start-ups. Bank credit can better meet the financing needs of businesses at the growth stage. Direct financing, such as bonds and equities, is very important for relatively mature enterprises. At present, banking credit accounts for more than 80% of total financing activities, while equity financing accounts for less than 10%. The bond market is largely a quasi-credit market with commercial banks as the main players. It is characterized by a narrow range of bond offering, inactive trading and poor market depth. If enterprises rely too much on banks and there is a mismatch between their life cycle and production cycle, there tends to be overuse of credit resources by large and medium-sized enterprises, and consequently a lack of necessary funding support for MSEs and innovative firms. Financial authorities and enterprises should reach consensus that concerted efforts should be made to develop the capital market and completely balance out the disparity between direct and indirect financing.


Fourth, we should establish and improve the corporate governance structure with Chinese characteristics. Unsound corporate governance has always been a hidden problem. We have seen cases where huge losses were incurred due to manipulation of major shareholders in some institutions and insider control in other institutions. Since most financial institutions have a significant bearing on the public interest, more attention should be paid to corporate governance. A modern corporate system must be put in place, and the CPC leadership must be strengthened constantly. There should be processes and procedures facilitating sound checks and balances among corporate governance bodies. We should implement the declaration of the G20 Hangzhou Summit and take the lead in materializing the corporate governance consensus reached by the Group of 20 and OECD in the financial sector.


Fifth, we should impose stringent sanctions on rule and law breakers in a timely manner. In the past period, some institutions disclosed false information, manipulated asset quality classification, and even blatantly cooked the book. Such malpractices have undermined the credibility of the financial industry. There are many causes, but the main ones include noncompliance with the capital rules, unsound corporate governance, failure to strengthen market constraints and weak supervision and law enforcement. When the cost of violating the rules and laws is too low, law-breaking practices will be further instigated. Therefore, supervisors must dare to fight, stringently enforce the laws and resolutely safeguard the dignity of laws and regulations. In the past two years or more, the banking and insurance supervisors have investigated and held the institutions that violated appropriate laws and regulations accountable. Over 8,000 people were subject to punishments and the institutions in question were subject to over RMB 6 billion worth of fines and confiscations. A range of stringent supervisory actions were taken to crack down on false asset classification and over RMB 4 trillion worth of non-performing loans were disposed of.


Sixth, we should be determined to restructure the allocation of financial assets. Currently, bank deposits exceed RMB 78.7 trillion. The value of asset management products, which are essentially quite like bank deposits, stands at over RMB 60 billion. In addition, there is a considerable amount of corporate deposits and social idle funds. How to turn these funds into long-term stable sources of capital for investment through institutional investors is a pressing issue. We should encourage the development of various types of institutional investors, such as publicly offered funds, private equity, insurance, trust and wealth management. By doing so, the investor structure that is currently dominated by retail investors can be changed, and a market culture for long-term investment and value investing can thereby be fostered. On the other hand, the stable funding ratio and investment conversion efficiency can be improved. As far as pension is concerned, we can also draw on the experience of other countries. Greater efforts should be made to build the three-pillar pension system, i.e. basic social security, corporate annuity and commercial insurance, and increase the share of our pension funds in the capital market to the world average.


Seventh, we will resolutely prevent the resurgence of products with complex structures. China tops the world in terms of additional capital invested, but we are facing a tough job to improve the efficiency of capital utilization. The key is to address the issue of “outflow of capital from the real economy to the virtual sector”, and clean up the idle running of funds inside the financial system. Over the past two years, we have resolutely cracked down on market malpractices and dismantled shadow banking entities, resulting in a net reduction of high-risk assets by RMB 13.74 trillion, thus shortening the funding chain and lowering the funding cost. At present, the world is seeing a trend of relaxing supervision and reviving shadow banking, which we should be highly alerted to. The outflow of capital from the real economy to the virtual sector and complicated financial products with multi-layered embedded tranches in China, once the worst financial problem in the world, must not be allowed to repeat itself.


Eighth, we must face up to the problem of real estate financialization in some regions. In recent years, the leverage ratio of the household sector in some cities has risen rapidly, with the debt ratio of a considerable proportion of households reaching unsustainable levels. What is more serious is that about half of new savings resources are invested in real estate. Excessive financing in the real estate industry not only squeezes credit resources available for other industries, but also tends to incentivize speculative investment in real estate, further inflating the housing bubble. When you buy an apartment to live on your own, it means that you receive an equal amount of market rental and spend an equal amount every month, which also means that your apartment produces an equal amount of added value. If you buy another apartment for rent, you will have the same income and output. However, when you buy an apartment for investment or speculation purpose only and do not rent it out, it is a pile of idle cement, steel bars and bricks. The housing market is highly area-specific. It is normal for prices to rise and fall in different regions. However, “houses are for living, not for speculating.” History has proved that countries that rely excessively on real estate to realize and maintain economic prosperity will eventually pay a heavy price. Residents and businesses that rely on blindly speculative investment in real estate for wealth management purposes will eventually find it uneconomical.


At present, China has entered a critical period of economic transformation and upgrading and structural reform. The transition from old to new growth drivers keeps accelerating. The capability of the financial sector to serve the real economy has continued to improve. Funds channeled by banks and insurance companies to industrial and commercial enterprises have increased rapidly. In particular, loans to manufacturing and high-tech industries and private enterprises have rebounded significantly. The difficulties faced by MSEs in accessing affordable financing have been alleviated. By the end of May, the inclusive MSE loans extended by the five major banks had grown by 23.7% compared with the end of last year, and the average interest rate was 4.79%, down 0.65 percentage points year on year. Most of the MSE loan targets planned for this year have been completed. In addition, the banking and insurance sectors are extending full support to the issuance of general bonds and special bonds by local governments, and earnestly implementing relevant policies and plans of the Central Government on providing funding support to projects that aim to shore up infrastructure deficiencies. We believe that by deepening supply-side structural reforms and expanding effective domestic demand, we will offset the impact of unfavorable factors coming from all sides. China’s economy and finance will continue to move forward in a steady and sound manner.


The above observations are for your reference only.


I wish this forum a complete success!


Thank you!

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