Twice-a-decade Central Financial Work Conference readout and notes
Background and takeaways from the key all-hands meeting in Beijing.
Same-day translation and notes on important speeches or policy documents out of China have long been a signature and beloved product of Pekingnology, but as other parts of our work become increasingly hectic and official releases always come after business hours, such output has decreased. I’ll make an exception for the Central Financial Work Conference today and thank my colleague Ms. Yuxuan Jia for also staying up late. Please note all the background and explanations are ours only. This is not investment advice. —— Zichen.
The translation, in block quote, is based on the official Chinese-language readout published by Xinhua News Agency.
On October 30th and 31st, the Central Financial Work Conference was held in Beijing. Xi Jinping, General Secretary of the Communist Party of China Central Committee, President of the People's Republic of China, and Chairman of the Central Military Commission, attended the conference and delivered an important speech.
The 中央金融工作会议 Central Financial Work Conference, previously known as the 全国金融会议 National Financial Work Conference, convened in Beijing from Monday to Tuesday. Over the past 26 years, the National Financial Work Conference has been held five times, once every five years, since its inception in 1997. The transition from "national" to "central" in its new title is an apparent elevation in its status, because "Central" denotes the Party, and the Party leads all.
This conference also marks the first central-level gathering on finance following the establishment of the Central Financial Work Committee. This development was outlined in a plan jointly issued by the Communist Party Central Committee and the State Council during the Second Plenary Meeting of the 20th Party Congress in March 2023.
Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang, and Li Xi, members of the Political Bureau of the Central Committee of the Communist Party of China, also attended the conference.
The Standing Committee of the Politburo, China’s highest echelon of power, currently has seven members. All of them attended this meeting. In comparison, five years ago, only five attended. It’s also a testament to the elevation of the financial work meeting this year.
During his important speech, Xi Jinping summarized the financial work since the 18th Party Congress, analyzed the situation facing high-quality financial development, and deployed the financial work for the current and future periods. Li Qiang provided specific instructions for carrying out financial work.
The conference emphasized that finance is the lifeblood of the national economy and an important part of the country's core competitiveness. It called for accelerating the construction of a strong financial nation, comprehensively strengthening financial regulation, improving the financial system, optimizing financial services, preventing and resolving risks, and steadfastly following the path of financial development with Chinese characteristics. This is to promote high-quality financial development in China and provide strong support for the comprehensive advancement of the Chinese path to modernization and the great cause of national rejuvenation.
The conference pointed out that since the 18th Party Congress, under the centralized and unified leadership of the Party Central Committee, the financial system has provided strong support for economic and social development, and has made important contributions to achieving the first centenary goal of building a moderately prosperous society in all respects and preventing and resolving major risks.
Official readouts of the meetings like this typically start with a positive assessment of the achievement of relevant work prior to the particular meeting.
The Party Central Committee has combined Marxist financial theory with China's specific circumstances and fine traditional culture, striving to grasp the law of financial development in the new era, continuously promoting innovation in China's financial practices, theory, and institutions, and vigorously advancing the development of Chinese-style finance.
A positive assessment is typically followed by the official reason of the achievement, and that’s what this paragraph is about. What stands out to many is, I guess, the fine traditional culture part. What does it have to do with finance?
In July, 2021, Xi Jinping said at the ceremony marking the centenary of the CPC “We must continue to adapt the basic tenets of Marxism to China's specific realities and its fine traditional culture.”
Furthermore, in his report to the 20th Party Congress in October, 2022, Xi said “Chinese Communists are keenly aware that only by integrating the basic tenets of Marxism with China's specific realities and fine traditional culture and only by applying dialectical and historical materialism can we provide correct answers to the major questions presented by the times and discovered through practice and can we ensure that Marxism always retains its vigor and vitality.”
In the Chinese context, that means “fine traditional culture” was formally integrated into the official ideological framework of the CPC. Before the 2021 and 2022 developments, there was only “the basic tenets of Marxism with China's specific realities” but not “fine traditional culture.”
Since “fine traditional culture” has been canonized, it’s not illogical - at least to us - to see The Party Central Committee has combined Marxist financial theory with China's specific circumstances and fine traditional culture. What does it mean in practice? Read on.
The conference stressed the need to adhere to the centralized and unified leadership of the Party Central Committee in financial work, focus on people-centered values, prioritize serving the real economy, make risk prevention and control a perpetual theme of financial work, promote financial innovation within a market-oriented and law-based framework, deepen structural reforms in the financial supply side, and balance financial openness and security while adhering to the overall work guideline of seeking progress while maintaining stability. These achievements in practice and theory have not come easily. At the same time, it is necessary to be clear-eyed about the various contradictions and issues in the financial field, some of which are still prominent. There are still many hidden dangers in economic and financial risks, the efficiency of financial services to the real economy is not high, financial misconduct and corruption persist, and financial supervision and governance capabilities are weak. The financial system must effectively raise its political awareness, maintain a broad perspective on national development, strengthen its sense of mission, and resolutely address these problems at their root in order to contribute to the construction of a strong country and the great rejuvenation of the nation.
The conference emphasized that for the current and future periods, it is necessary to adhere to and strengthen the Party's overall leadership over financial work, guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, comprehensively implement the spirit of the 19th Party Congress, comprehensively implement the new development concept, deeply understand the political and people-oriented nature of financial work, take building a strong financial nation as the goal, promote high-quality financial development as the theme, deepen structural reforms on the financial supply side as the main line, make the purity, professionalism, and combat effectiveness of the financial workforce a key support, focus on strengthening overall regulation and preventing and resolving risks, maintain the overall work guideline of seeking progress while maintaining stability, balance development and security, firmly adhere to the bottom line of preventing systemic financial risks, resolutely follow the path of financial development with Chinese characteristics, accelerate the construction of a modern Chinese financial system, continuously meet the growing financial needs of economic and social development and the people, and constantly create a new era in financial work.
The paragraph, including the requirement of integrity for the financial workforce, is a reminder that the financial system operates entirely under the leadership of the Party. Their role, within the broader context, is to faithfully execute the tasks assigned by the Party. It is of utmost importance to maintain unwavering commitment to this role and avoid becoming disorganized or undisciplined individuals driven solely by financial gain. Financial endeavors must consistently adhere to the overarching principles and objectives.
It is to be understood that the operations of Chinese financial institutions, under the guidance of the CPC, are driven by a different imperative compared to their Western counterparts. In the Western context, the primary concern often centers around profitability and maximizing returns for shareholders, while adhering to regulatory requirements such as those set forth by the likes of the Federal Reserve. Whereas in China, where financial institutions, especially those state-run, are under predominant Party influence, the overarching objective is not mere financial gain but rather the fulfillment of a broader mandate.
What is the broader mandate?
The conference pointed out that high-quality development is the primary task of building a modern socialist country in an all-round way, and finance must provide high-quality services for economic and social development. It is necessary to focus on creating a favorable monetary and financial environment, effectively strengthen high-quality financial services for major strategies, key areas, and weak links, maintain the stability of monetary policy, pay more attention to countercyclical and cross-cyclical adjustments, enrich the toolbox of monetary policy, optimize the structure of fund supply,
maintain the stability of monetary policy, despite followed by more pro-stimulus language, appears to signal that China on monetary policy will not relax too much.
use more financial resources to promote technological innovation, advanced manufacturing, green development, and small and micro enterprises, vigorously support the implementation of the innovation-driven development strategy and regional coordinated development strategy, ensure national food and energy security, and so on. It is also important to activate the financial resources that are inefficiently occupied and improve the efficiency of fund utilization. Efforts should be made in the areas of technology finance, green finance, inclusive finance, pension finance, and digital finance. Modern financial institutions and market systems should be developed to facilitate the flow of funds into the real economy.
China believes in the real economy, and finance as an industry or sector should only serve that.
Technology finance, green finance, inclusive finance, pension finance, and digital finance 科技金融、绿色金融、普惠金融、养老金融、数字金融 are to be encouraged.
The financing structure should be optimized, the role of the capital market as a hub should be better utilized, the registration-based system for IPOs should be deepened, diversified equity financing should be developed, the quality of listed companies should be improved, and first-class investment banks and institutions should be cultivated.
The capital market here should be understood as the jurisdiction of the China Securities Regulatory Commission (CSRC).
Registration-based system for IPOs 注册制 is a market-oriented approach that focuses on disclosure, while 核准制 approval-based IPO is an administration-oriented approach that focuses on a company’s performance.
China has long focused on protecting investors, with an approval-based IPO process in place. After being tested at the STAR board of the Shanghai Stock Exchange, the ChiNext market of the Shenzhen Stock Exchange and the Beijing Stock Exchange (BSE), the registration-based IPO process was launched in all Chinese stock exchanges in February 2023.
However, government regulators, especially the CSRC, is widely perceived as being deeply involved in approving IPOs, not to mention that China’s stock exchanges are state-run.
In mid-September, against rampant market rumors of an IPO freeze by CSRC decrees as China’s stock market tumbled, the CSRC came out denying the rumors, saying that it is merely "strengthening the countercyclical regulation of the primary and secondary markets, while fully considering the capacity of the secondary market, maintaining a normalized and scientifically reasonable pace of new stock issuance, and better promoting the coordinated and balanced development of the primary and secondary markets. The recent temporary tightening of the IPO schedule is a measure to maintain the stable operation of the market. The CSRC and the stock exchanges have not suspended relevant work related to IPO acceptance, review, and registration."
Diversified equity financing should be developed seems positive to financing activities from private equities (PE), venture capital (VC), and mergers and acquisitions (M&A), especially compared to the statement five years ago when the wording was 积极有序发展股权融资 actively and orderly develop equity financing. Because Diversified is new.
First-class investment banks and institutions should be cultivated seems a boon to China’s leading investment banks such as the touted 三中一华 CICC, CITIC Securities, CSC Financial, and Huatai Securities.
Promote the high-quality development of the bond market. Improve institutional positioning, support large state-owned financial entities in becoming better and stronger, serve as the main force for serving the real economy and maintaining financial stability, strictly enforce licensing standards and regulatory requirements for small and medium-sized financial institutions, (and ask them to) conduct specialized operations based on local conditions, strengthen the functional positioning of policy financial institutions, and play the role of the economic shock absorber and social stabilizer.
The conference calls on large state-owned financial entities to become better and stronger, leaving out a possible “larger”.
These three words appear together in Beijing’s demand for non-financial state-owned enterprises. And in China’s contemprorary context, larger is a common accompaniment to "better” and “stronger.” See Xi’s report to the 20th Party Congress in October, 2022: “We will deepen reform of state-owned capital and state-owned enterprises (SOEs); accelerate efforts to improve the layout of the state-owned sector and adjust its structure; work to see state-owned capital and enterprises get stronger, do better, and grow bigger; and enhance the core competitiveness of SOEs.”
So on state-run financial entities, Beijing emphasizes quality over quantity, such as the quality of financial assets and risk management, and underscores leveraging expertise in specialized areas, rather than in expanding asset size or increasing the customer base; these factors are not the foremost priority.
A clear difference from 2017 was that at the time Beijing encouraged 发展中小银行和民营金融机构 developing small and medium-sized banks and private financial institutions and 大力发展中小金融机构 vigorously developing small and medium-sized financial institutions. Now it’s strictly enforce licensing standards and regulatory requirements for small and medium-sized financial institutions. Coming to mind is the debacle of thousands of depositors lost access to their savings in rural banks in central China’s Henan province.
With technology, even a regional financial entity could expand business nationwide at low cost. But the statement (and ask them to) conduct specialized operations based on local conditions apparently discourages that.
There have been two contrasting opinions regarding regional financial entities such as 村镇银行 village and township banks. One perspective emphasizes that in today's era of extensive internet connectivity, they could - and should be allowed to - establish an online presence and attract deposits from regions far beyond its local base. However, the alternative viewpoint, apparently endorsed here, emphasizes the necessity of maintaining a local focus. This means that these village and township banks should primarily serve their immediate communities and should not expand their services extensively through the internet to serve a national clientele.
Strengthen market rules, create a unified and coordinated regulatory financial market, promote the formation of long-term capital, improve corporate governance, improve China's modern financial enterprise system, improve the management of state-owned financial capital, expand channels for bank capital supplementation, and do a good job of isolating production and finance risks. Efforts should be made to promote high-level financial opening up to ensure national financial and economic security. Adhere to both "bringing in" and "going global," steadily expand institutional opening up in the financial field, facilitate cross-border investment and financing, attract more foreign financial institutions and long-term capital to operate and develop in China, enhance the competitiveness and influence of Shanghai as an international financial Center, and consolidate and enhance the status of Hong Kong as an international financial center.
In April 2018, President Xi Jinping announced during the Boao Forum that China would intensify efforts to open up the service sector: “China will adopt the following major measures to pursue further opening: First, we will significantly broaden market access. A number of landmark measures are to be launched this year. On services, financial services in particular, important announcement was made at the end of last year on measures to raise foreign equity caps in the banking, securities and insurance industries. We will ensure that these measures are materialized and at the same time make more moves toward further opening, including accelerating the opening-up of the insurance industry, easing restrictions on the establishment of foreign financial institutions in China and expanding their business scope, and opening up more areas of cooperation between Chinese and foreign financial markets.”
Regarding foreign financial institutions, by the end of 2022, there were a total of 41 foreign-funded legal entity banks, 116 foreign bank branches, and 135 representative offices operating in China. In the insurance sector, 68 foreign-funded insurance institutions and 79 representative offices were established in China.
The financial markets have also achieved significant milestones in their opening-up efforts, with the launch of the Bond Connect [a mutual bond market access scheme between the Chinese mainland and Hong Kong] and the official commencement of the Shanghai-London Stock Connect. Additionally, the Swap Connect between the Chinese mainland and Hong Kong has been implemented. China's A-shares were successively included in three major international indices, including the MSCI Emerging Markets Index. Chinese government bonds were incorporated into three major global indices, including the Bloomberg Barclays Global Aggregate Index.
The conference emphasized that comprehensive strengthening of financial supervision and effective prevention and resolution of financial risks are essential. It is necessary to significantly improve the effectiveness of financial regulation, legally bring all financial activities under supervision, comprehensively strengthen institutional regulation, conduct/behavioral regulation, functional regulation, penetration regulation, and continuous regulation, eliminate regulatory gaps and blind spots, enforce the law strictly, and crack down severely on illegal financial activities.
Institutional regulation, conduct/behavioral regulation, functional regulation, penetration regulation, and continuous regulation - five regulations in a row! Beijing apparently is not fully sure about financial entities’ compliance efforts, but wants the financial regulators to be more assertive, including in regulating their financial conduct - maybe check out what the UK’s Financial Conduct Authority does.
Penetration regulation refers to regulating not just the shareholders, but also shareholders’ shareholders.
China’s past financial regulation has been criticized as each regulator focusing only on the entities within its sector. For example, the insurance regulator only cares about insurance companies. What is laid out here is regulation over every conduct of every one, especially in cross-industry and cross-market financial activities, cross-business between different types of financial entities, illegal fundraising, fraudulent sales, market manipulation, information disclosure violations, and other illegal activities, complex layered operating structures or financial products, comprehensive supervision of the entire process of various financial activities.
Timely deal with risks in small and medium-sized financial institutions. Establish a long-term mechanism for preventing and resolving local government debt risks, establish a government debt management mechanism that is compatible with high-quality development, optimize the debt structure of central and local governments, promote the virtuous cycle of finance and real estate, improve the regulatory system for real estate enterprises, and strengthen macro-prudential management of real estate finance.
It remains to be seen what Establish a government debt management mechanism that is compatible with high-quality development entails. Yao Yang of the National School of Development at Peking University has some thoughts.
Optimize the debt structure of central and local governments signals the central government will take on more debt and local governments will less.
By now it’s widely believed that China’s central government takes too little debt and local governments too much. Xu Gao, Chief Economist of Bank of China International (China), wrote in a recent analysis translated by our sister newsletter The East is Read “Based on data from the IMF's Global Debt Database, the 2022 average share of central government debt in total government debt worldwide stands at 89%, with a median of 96%. This means that in most countries, government debt is primarily composed of central government debt. In contrast, the share of central government debt to total government debt in China ranges from 19% to 27%, by different calculation methods — significantly lower than the global norm. Even if local government bonds issued by the central government were categorized as part of central government debt, this ratio would only increase to a range of 46% to 65%, still below the international average.”
Fairly meet the reasonable financing needs of real estate enterprises of different ownerships, tailor policies to local conditions, make better use of policy tools, better support rigid and improved housing needs, accelerate the construction of the "three major projects" including affordable housing, and build a new model for real estate development.
It’s not news that China’s private real estate enterprises such as Evergrande and Country Garuden are in trouble, and they face significant financing difficulties including from China’s state-run financial entities. State-owned housing companies do much better. Fairly meet the reasonable financing needs of real estate enterprises of different ownerships is a continuation from what is known as 金融16条 16 measures supporting the real estate industry, which also said financing should be extended to private and state-owned housing companies equally.
Tailor policies to local conditions, also not new, means local governments can relax purchasing restrictions and restrictions on buyers’ financing based on their respective local situations.
Maintain the stable operation of the financial market, regulate financial market issuance and trading behaviors, guide expectations reasonably, prevent risk transmission across regions, markets, and borders, strengthen foreign exchange market management, and keep the RMB exchange rate basically stable at a reasonable and balanced level.
RMB, or the yuan, faces downward pressure against a strong USD. Keep the RMB exchange rate basically stable at a reasonable and balanced level, not new, is Beijing’s stance.
To prevent and resolve financial risks, it is necessary to balance the relationship between rights and responsibilities, establish a risk disposal responsibility mechanism that is consistent with rights and responsibilities, grasp the relationship between speed and stability, take timely and effective measures to resolve risks under the premise of stabilizing the overall situation, resolutely crack down on illegal activities and corruption, and strictly guard against moral risks. For risk early identification, early warning, early exposure, and early disposal, establish a financial risk early correction mechanism with hard constraints.
The conference pointed out that strengthening the centralized and unified leadership of the Party Central Committee over financial work is the fundamental guarantee for doing a good job in financial work. It is necessary to improve the institutional mechanisms for the Party's leadership of financial work, give full play to the role of the Central Financial and Economic Affairs Commission, and strengthen overall coordination and supervision. Give full play to the role of the Central Financial Work Commission and effectively strengthen the Party's construction in the financial system. Give full play to the role of local Party committees' financial work committees and financial work committees, and implement territorial responsibilities. It is necessary to adhere to the standards of political firmness, strong ability, and rigorous work style, forge a high-quality and professional financial cadre team that is loyal, clean, and responsible, vigorously promote fine Chinese traditional culture in the financial system, adhere to honesty and trustworthiness, make profit based on moral behavior, be prudent, innovate on the basis of what has worked in the past, and abide by the law and compliance. Strengthen lawmaking in finance, timely promote legislation in key areas of finance and emerging areas, to safeguard financial development.
Remember the fine Chinese traditional culture? It’s further explained here as 坚持诚实守信、以义取利、稳健审慎、守正创新、依法合规 adhere to honesty and trustworthiness, make profit based on moral behavior, be prudent, innovate on the basis of what has worked in the past, and abide by the law and compliance, or at least parts of them.
The conference emphasized that General Secretary Xi Jinping's important speech scientifically answers a series of major theoretical and practical issues related to the development of the financial industry. It is an important part of Xi Jinping's economic thought, an important innovation in Marxist political economics on financial issues, and provides a fundamental guideline and action guide for promoting high-quality financial development in the new era. All regions and departments, especially the financial system, must further align their thinking and actions with the spirit of General Secretary Xi Jinping's important speech and the Party Center's decision-making and deployment, adhere to goal-oriented and problem-oriented principles, comprehensively strengthen the Party's leadership over financial work, and effectively carry out key tasks such as strengthening financial supervision, preventing and resolving financial risks, and promoting high-quality financial development. Accelerate the construction of a strong financial nation, grasp the spirit of the conference, and strengthen the publicity and implementation, strengthen the team building of financial cadres and talent teams, and ensure the implementation of work deployments.
It’s typically understood that Beijing’s readouts of official meetings are actually what the top leader in that meeting said, but this paragraph says The conference emphasized that General Secretary Xi Jinping's important speech scientifically answers a series of major theoretical and practical issues related to the development of the financial industry. The likely explanation is that this paragraph didn’t originate from Xi’s speech, but someone else’s.
Given that the first part of the readout said Li Qiang provided specific instructions for carrying out financial work, so this is likely what China’s Premier said.
He Lifeng delivered a concluding speech. Officials from the People's Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and representatives from Beijing, Liaoning, Hubei, and Sichuan provinces spoke at the conference.
He Lifeng, Member of the Politburo and Vice Premier of the State Council, is now Director of the office of the Central Finance and Economic Affairs Commission, a role that used to be Liu He’s.
Pan Gongsheng, Governor of the People’s Bank of China, seen in delivering a speech.
Li Yunze, Head of the National Administration of Financial Regulation, seen in delivering a speech.
Yi Huiman, Head of China Securities Regulatory Commission, seen as delivering a speech.
Members of the Politburo of the Central Committee of the Communist Party of China, members of the Secretariat of the Central Committee, relevant leaders of the Standing Committee of the National People's Congress, State Councilors, the President of the Supreme People's Court, and leaders of the National Committee of the Chinese People's Political Consultative Conference attended the conference.
Members of the Central Financial Committee, major officials from various provinces and regions, central and state organs, relevant people's organizations, departments of the Central Military Commission, financial institutions under central management, and some enterprises also attended the conference.