China's Central Economic Work Conference has, for the first time, introduced the goal of building a "financial powerhouse", aiming to achieve "high-quality financial development" for the country. Overall, achieving "high-quality development" has become the overarching policy orientation for the future development of China's financial industry. A recent article in Qiushi, the leading official theoretical journal and news magazine of the Chinese Communist Party, further elaborated on this theme. It stated that, without robust support from the real economy, financial prosperity will be illusory. The article continues that it is therefore important to promote high-quality economic and social development through the equally high-quality financial industry.
This indicates that the development of the financial industry in China not only requires stability and self-improvement but more crucially is the implementation of the requirement for financial services to the real economy, thereby facilitating effective support for economic structural reforms. According to researchers at ANBOUND, the goal of high-quality financial development has raised policy requirements. It is not just about the straitening of the financial industry itself, but also about enhancing the quality of services to the real economy. In this regard, high-quality financial development is more about the prudence of the financial sector and the efficiency improvement in serving the real economy.
Hence, the strategies previously adopted by some financial institutions to pursue profits and asset size, such as supporting the real estate sector and investing in local financing platforms, will not only be discouraged but will also face further constraints. In the future, the increment of financial services to the real economy will mostly come from these new economic sectors. Finance also needs to play a role in the areas of economic transformation and upgrading to enhance the quality of new financial services.
In this context, the financial industry's future development will be more than mere expansion and increasingly moving toward quality improvement. This extends beyond state-owned banks to encompass the entire financial sector in the country. Within this framework, financial institutions will need to navigate the delicate equilibrium between profitability and serving the real economy, overcoming the inherent profit-driven nature of capital. Concurrently, achieving high-quality development in financial institutions entails not only augmenting their role in economic service but also addressing policy imperatives such as narrowing interest rate spreads and reducing financing costs. This, in turn, can present challenges for financial institutions.
The advancement of the financial industry toward high-quality development critically depends on achieving a balance between financial innovation and risk mitigation while concurrently boosting the competitive edge of the financial sector. The Central Economic Work Committee has explicitly underscored the need to recognize the infectious, concealed, and destructive nature of financial risks. It also highlights that impractical and disorderly innovation will only foster substantial risks and losses. These declarations not only dismiss various business practices purportedly endorsing financial innovation but also elevate the standards for future risk prevention and financial regulation within the financial industry of the country. As China implements comprehensive supervision, the focal point is now to create a regulatory framework of greater penetrative and traceable attributes. The structural reforms in the financial sector will then need to harmonize with the requirements of the economic supply-side structural reform. Any attempts to exploit regulatory gaps for arbitrage will be met with stringent penalties in the coming years.
Under such circumstances, it is noteworthy that Chinese financial institutions may need to consider the real-time constraints of regulatory red lines and enhance their risk identification capabilities to survive. Researchers at ANBOUND recently noted that some regulatory authorities have emphasized the need for financial institutions to demonstrate initiative, distinguishing between financing needs in different risk categories. The policy implication here is that, even in high-risk sectors and industries, there should be limitations on the allocation of financial resources. In emerging sectors supported and encouraged by policies, this also requires financial institutions to exercise subjective initiative, identifying and screening as per market and financial principles. This approach focuses on responsible and differentiated allocation of financial resources rather than undifferentiated deployment. This situation signifies that improving risk identification capabilities and enhancing the subjective initiative in serving the real economy are key requirements for enhancing the competitiveness of the financial sector and addressing the challenges of achieving high-quality financial development in the country.
The high-quality development of the financial sector encompasses not only the enhancement of financial assets but also the mitigation of existing risks. These challenges extend beyond mere market-driven and cyclical issues. Financial institutions, driven by their own interests, have magnified associated risks, necessitating a corresponding acceptance of responsibilities. In alignment with these considerations, the Central Economic Work Conference has explicitly outlined directives to unlock financially underutilized resources and enhance fund utilization efficiency. The recently published third-quarter monetary policy execution report acknowledges that economic structural transformation naturally involves the replacement of various components, prompting adjustments in credit demands. It emphasizes the importance of "activating existing loans, enhancing the efficiency of current loan utilization, and optimizing the direction of new loans" as equally crucial factors for fostering economic growth. Consequently, in an environment constrained by overall growth limitations, financial institutions must refine the asset-liability structure through strategic adjustments and the reinvigoration of asset portfolios. Hence, the high-quality development of the financial sector confronts the challenge of both mitigating and revitalizing "low-quality" high-risk financial assets.
Such a development of the financial sector is an integral part of the overall socioeconomic progress. Looking at the discussions from the Central Economic Work Conference, key aspects include the establishment of a modern financial system that suits China, fostering top-tier investment banks and institutions, bolstering large state-owned financial institutions, implementing comprehensive financial supervision, and adhering to a prudent monetary policy. This development not only focuses on the financial industry's growth but also emphasizes the realization of its core objectives, which are serving the real economy and enhancing its capacity and efficiency in doing so.
Final analysis conclusion:
China's Central Economic Work Conference has put forth new requirements for the "high-quality development of finance", signifying a shift in the focus of the financial industry. The emphasis now lies not in expanding the scale but rather in enhancing the capacity and efficiency in serving the real economy. The country's financial sector will grapple with challenges such as how to serve the real economy, identify risks to boost competitiveness, and resolve existing risks while revitalizing "low-quality" financial assets.
