Li Yang: Building a capital market with Chinese characteristics The registration system is a necessary prerequisite

Source: China Economic Network

China Economic Network Beijing, July 25 (Reporter Ma Changyan) Li Yang, member of the Faculty of the Chinese Academy of Social Sciences and chairman of the National Finance and Development Laboratory, said at the 2021 International Monetary Forum on the 24th that the construction of a capital market with Chinese characteristics should start from the three incisions of entrance, export and process supervision, and the implementation of the registration system and the improvement of the delisting mechanism are absolutely necessary prerequisites.

Focusing on the "New Stage of Economic Development and New Tasks of Financial Reform", Li Yang delivered a keynote speech at the opening ceremony of the forum. He pointed out that in the new stage of development, financial reform and development, as an important part of China's economic reform and development, should take new steps.

Li Yang believes that new steps have been made in financial reform, and it is necessary to improve the reform of financial institutions. Over the past 40 years of reform and opening up, the scale of China's financial institutions has expanded rapidly and its financial strength has increased rapidly. However, structurally, China's bank-based financial institution system is conducive to quickly gathering financial resources, engaging in large-scale investment and "doing big things", but there are also serious drawbacks. These drawbacks are reflected in: insufficient ability to cope with the aging of the population, insufficient ability to support innovation, and serious shortage of institutional investors in the capital market.

"The reform of financial institutions should benchmark the pain points and difficulties of development." Li Yang said that the reform of financial institutions should address the challenges of an aging population, supporting innovative development, capital market development, and responding to the global debt flood and long-term ultra-low/negative interest rates. It is necessary to do a good job in diversifying financial institutions: deepen the reform of commercial banks, accelerate the transformation of commercial banks into service industries, reduce excessive dependence on interest margins, and steadily promote the transformation of commercial banks into mixed operations; promote the reform of the pension mechanism; vigorously develop the insurance industry; encourage the development of non-bank financial intermediaries such as investment banks, various funds, trusts, VCs, PE, and financial leasing; and continue to complete the task of "improving the financial system of commercial finance, development finance, policy finance, and cooperative finance with a reasonable division of labor and complementarity."

On July 6, the Financial Stability and Development Committee of the State Council held its 53rd meeting and proposed to build a capital market with Chinese characteristics. Li Yang pointed out that it is difficult for China's stock market to reflect the operation of the national economy, and it is even more difficult to lead China's economy to optimize its structure and high-quality development. The distortion of the industry structure is one of the reasons. Comparing the situation in the United States, he said that the industrial distribution of listed companies in the United States reflects the characteristics of informatization and post-industrialization and can play a role in leading the development of economic modernization, while the industrial distribution of China's stock market reflects the characteristics of the traditional era of industrialization. Li Yang believes that to change this situation, we must start from the three incisions of entrance, export and process supervision, and the implementation of the registration system and the improvement of the delisting mechanism are absolutely necessary prerequisites.

Li Yang believes that the capital market with Chinese characteristics should attach importance to the asset management market. "Historically, the proportion of bank credit financing in China to all social financing has been stable at more than 80%, and since 2012, with the vigorous development of various asset management industries, the proportion of bank credit financing has dropped to less than 60%. In the second half of 2015, the asset management industry began to be rectified, and the proportion of bank credit financing rebounded to more than 80% in 2018/2019. Li Yang said that the development of asset management is an effective mechanism for building a capital market with Chinese characteristics, and the basis of asset management is a fund trust mechanism. Bank balance sheets should be opened to allow more assets and liabilities in the "black box" to enter the market. It is also necessary to develop public RElTs to help solve the long-term mismatch of terms in China's financial operation, which is mainly characterized by "borrowing short and using long", and provide new tools for reducing leverage.

He stressed that the role of financial institutions in the development of the capital market should not be ignored. In developing the capital market, China has always adhered to the idea of "either-or" between banks and financial markets. Accordingly, banks are excluded from the capital market development mechanism. This is misleading. The capital market is a long-term financial integration market, and the medium- and long-term loans of banks, the stock market, and the bond market together constitute a rich and colorful capital market. But it is not possible to ignore the basic fact that Bank of China's loan financing assumes an important responsibility for China's capital formation.

In light of China's national conditions, Li Yang pointed out that it is necessary to establish a capital market in which financial institutions play an important role: the control of financial institutions, especially banking financial institutions, must be relaxed; banks must be allowed to gradually open their balance sheets so that they can integrate with the financial market and develop in synergy; banks are allowed to support various activities in the financial market; and the mixed operation of commercial banks must be steadily promoted.

In addition to the stock market, Li Yang believes that the structure of the bond market also needs to be adjusted. China's bond market was once dominated by safe assets (including treasury bonds and policy financial institution bonds), in 2008, safe assets accounted for 3/4, and in 2019, the proportion of bonds of the same caliber fell to less than 1/4. This is different from the trend of the world and the trend of developed countries. The safe asset market is the liquidity management of financial institutions, is the main platform for the central bank to operate in the open market, this market determines the benchmark interest rate level, determines the risk-free yield curve, restricts the efficiency of financial macro-control; in the open economic environment, this market constitutes the main platform for the internationalization of a country's currency. Steadily increasing the proportion of safe assets in the debt market is another important task for China's future financial reform.

"Most of China's bonds are purchased and held by financial institutions, making it difficult for the bond market to play its function of improving the level of marketization, and distorting the supply and demand of funds in the market." And risks that occur in the bond market and risks that occur on the balance sheets of commercial banks can spill over into each other. Li Yang said that changing the pattern of capital flows in China's bond market "from the banks and back to the banks" to form a pattern of "coming to the market from the banks and non-financial sectors" is the main task of China's bond market reform.

Steadily promoting the process of RMB internationalization is also one of the tasks of financial reform. "The great changes that have not been encountered in a hundred years and the major epidemic that have not been encountered in a hundred years highlight the importance of the internationalization of the renminbi. To become an economic power in the world, China must have a world currency that has a major impact on the international monetary system. Li Yang said that the international status of a country's currency is mainly reflected in the role played in international trade and international financial markets as price standards, payment and clearing tools, hedging tools and value storage tools. In recent years, the security of assets has played a prominent role in achieving the international status of a country's currency.

In the four major areas of the international debt market, foreign exchange transactions, global payments and foreign exchange reserves, the proportion of the renminbi has shown a strong growth momentum. Li Yang pointed out that due to the low starting point, the renminbi is still on the fringes of international currencies. The internationalization of the renminbi is a large-scale process. Therefore, the above situation is difficult to change in the short term. Nevertheless, China must unswervingly promote the internationalization of the renminbi. It occupies an important position to develop a safe and efficient bond market and actively promote non-residents to purchase and hold RMB fixed-value financial assets.

Li Yang also said that we should attach great importance to the construction of financial infrastructure. China has strengthened the construction of financial infrastructure in recent years, and has greatly improved the efficiency of financial infrastructure through the introduction of financial technology. However, compared with the United States, there is still a big gap in general, especially in the internationalization and openness of financial infrastructure. "China must catch up in this area."