PBC governor proposes reform measures

Market-oriented reform in China's financial industry is entering the final stage as the nation started reform and opening-up over three decades ago and began to build a socialist market economy two decades ago.

The Decision on Major Issues Concerning Comprehensively Deepening Reforms (the Decision) published after the Third Plenary Session of the 18th CPC Central Committee includes three paragraphs on domestic financial reform. Market participants, who tried to read between the lines of the less than 400 words, came up with widely different interpretations.

In an exclusive interview with Caijing on Dec. 6, PBC Governor Zhou Xiaochuan expounded on the priorities and direction of the financial reform laid out in the Decision. When asked about the decisive role the Decision says market forces will play in allocating resources, Zhou identified three complementary facets for China's financial reform.

The first is to broaden private capital and foreign investment's access to the financial market to promote competition. The second is to allow marketized pricing of financial factors, mainly through interest rate and exchange rate reforms, to better allocate capital and resources. The third aspect is to invigorate the market by giving more latitude to market participants, for instance, empowering enterprises and individuals alike to invest freely.

Zhou stressed that the three aspects reinforce one another, and further explained that only by broadening market access can full competition be realized to generate reasonable price levels, which are a prerequisite for optimized resource allocation. Enterprises without autonomy over their own business operations have little role to play in the market, as market prices are determined by the relationship between market players, said Zhou.

As for specific policy measures, Zhou contends the establishment of private banks and the introduction of a negative list on foreign investment by the Shanghai Pilot Free Trade Zone are aimed at broadening market access; and the interest rate and exchange rate reforms are part of China's factor price reform. Liberalization of companies' and individuals' outbound investment and innovations in this field are part of market participants' efforts to gain autonomy, said Zhou.

Among all the reforms in the financial sector, interest rate reform is regarded by banking industry insiders as a key reform that relates to overall financial stability. The marketization of interest rates has reached a critical point after 17 years of progressive reform since interbank lending rates were liberalized back in 1996.

The last barrier is the ceiling on deposit rates, which to a large extent have been nullified by the many wealth management products offered by banks. The dual-track interest rate system which has long existed in the financial market will fade into history.

In Zhou's view, now is the time for China to wrap up the market-oriented reform of interest rates. "Only in the time of (economic) crisis or recovery, will the PBC focus on maintaining financial stability," said Zhou, "In normal times, we do not need to protect financial institutions; rather, we'd like to see banks compete with one another to offer better services to the real economy, as opposed to be preoccupied with making money for themselves." Zhou added that the Chinese economy is in a "relatively normal" state now.