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Policy Options for Constructing a Prudent Macro Management Framework in China


Lei Wei

The outbreak of the international financial crisis has taught us a profound lesson, that is, guarding against the systematic risks and strengthening the prudent macro management is of vital importance to the stability of the financial system of a country. Therefore, it is of vital importance to draw on and pay close attention to the international trend of reform on prudent macro management framework and construct one that is suited to China's national conditions.

I. Analysis of the Necessity of Constructing a Prudent Macro Management Framework at the Present Stage of Development in China

Currently, the financial regulation in China still remains at the level of prudent micro management and the concept of a prudent macro management has not been established to view the financial industry as an integrated whole. At the present stage, the latent hidden systematic risks are pressing for the reform of China's financial regulation system.

1. The potential risks resulting from macro factors affecting financial stability are increasing

At present, China lacks a special department in its macro-control system to get a grasp of the overall picture of the systematic financial risks from the prudent macro management perspective and to make in-depth analysis of the close links and inter-influence between the financial system and the macro-economy. This will not only impair the accuracy and pertinence of the macroeconomic policy-making, but will go against the precaution and removal of systematic risks. At the present stage, the macro risks facing China's financial system mainly include:One, the adverse impact of the disequilibrium and discontinuity in economic development on bank credit and asset quality. Two, the pressure generated by the accumulation of the asset price bubbles, such as the real estate prices, on the stability of the financial system. Three, the pressure arising from the drastic increase of loans through investment and financing platforms of local governments on bank loan risks. Four, the growing impact of the cross-border capital flow on China's financial stability.

2. More precautious measures are required against systematic risks in an overall development

In recent years, with the development of the pilot projects of comprehensive financial business management and of multi-industry and trans-market intersecting financial business operation represented by wealth management products and private equities, the currently enforced financial regulation system is being faced with severe challenges and the systematic financial risks and regulation-originated loopholes have been on the rise. On one hand, there is a lack of effective supervision over the ever-growing financial holding companies, particularly there is little supervision over the comprehensive financial business operation when production and finance are combined. Therefore, the potential risks cannot be neglected. On the other hand, there is a shortage of unitary regulatory rules on multi-industry and trans-market intersecting financial business operations, thus leading to a possible rise of interest arbitrage.

II. China's Present Financial System and Relevant Problems

1. China's present financial regulation system

At present, the People's Bank of China, China Banking Regulatory Commission, China Securities Regulatory Commission and China Insurance Regulatory Commission have conducted the financial supervision and control in its initial form, thus officially forming the financial regulation system characterized by divided operation, divided control and division of labor and co-operation between the said bank and commissions. The People's Bank of China is mainly in charge of formulating, enhancing and implementing monetary policies and, meanwhile, it also practices foreign exchange control, exercises follow-up surveys of the international financial market and issue early-warnings on market risks, supervises and controls cross-border capital flows, interbank markets, bank bond markets, bank bill markets, interbank foreign exchange markets, gold markets as well as transactions of derivatives related to aforesaid markets. In 2008, the State Council approved the Regulation on the Main Functions, Interior Institutions and Staffing of the People's Bank of China and entrusted the bank the function of safeguarding the financial stability.

2. Problems existing in China's financial regulation system

In recent years, with the rapid development of financial globalization, liberalization and financial innovation, the financial industry has been opening wide at a faster pace and great changes have taken place in financial regulation. As a result, the present financial regulation system has become increasingly unable to adapt to the changes and the inherent defects of this system have gradually loomed up.

(1) Inadequate supervision and coordination under the present regulation system Currently, multi-industry problems are mainly solved through consultation at the ministry-level joint conferences between the bank and the commissions. Substantially, the ministry-level joint conference mechanism is only an expedient measure for strengthening financial regulation and coordination under the present financial system, which has at least the following three defects. One, the ministry-level joint conference system is usually a temporary financial regulation and coordination mechanism established at the approval of the State Council. Therefore, for lack of legal support on the national level, the constraint and authoritativeness of such a mechanism will be crippled considerably and the decisions made at the joint conferences won't be carried out to the full. Two, usually, “memorandums” are signed by various sectors for the establishment of the ministry-level joint conference mechanism without a workable restraining mechanism. Once interest-related disputes take place between those sectors over some policy or business issues, the coordination by the joint conference mechanism will be easily made ineffective. Three, though the People's Bank of China plays a role in safeguarding the financial stability, it has no relevant measures and administrative authoritativeness.

(2) Inadequate construction of the system for guarding against systematic financial risks

There has been inadequate construction in China of the system for guarding against systematic financial risks. With the constant deepening of the market-oriented financial sector and the opening up, the systematic financial risks will exert increasingly evident influence on China's financial system. Once the economic growth slows down or financial innovation becomes excessive in the days to come, there will well be a possibility of an all-out breakout of systematic financial risks. Therefore, we should take precautions by making full use of China's latter development advantages in systematic innovation and design and plan in advance a financial regulation system conducive to guarding against and dissolving systematic financial risks.

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