his year, China will hasten the pace of housing reform, create a way to mitigate financial risk and control macro-leverage, and reorient financial services toward the real economy. Those were the takeaways from China’s economic work conference in December, an annual event convened by the CPC Central Committee Politburo, which lays out the Communist Party’s economic agenda for the coming year.
Financial risk control is expected to take prime place. This is evident from the tone of the 19th CPC National Congress in October, which identified “preventing and mitigating major risks” among the most significant tasks along the road to building a moderately prosperous society. “The bottom line of no systematic financial risk should be upheld,” its report said.
Five central measures will control and mitigate financial risk in China. First, asset bubbles must be curbed. The most obvious is in China’s real estate sector. Aside from controlling house prices, Chinese policymakers must look to the long term by establishing equality of rights between renters and homeowners, and distribute resources more equitably between China’s regions, as well as develop cities of different scales.
Second, China must stabilize its foreign exchange reserves. Continuing depreciation of the yuan and declining forex will naturally bring financial risk. Last year the central government rolled out measures to stabilize forex reserves, including limiting overseas investment in real estate and the acquisition of hotels and cinemas.
The third is to stabilize the country’s debts. Given that debt among State-owned enterprises and local governments has far exceeded the warning line, the former should pursue mixed-ownership reform and debt-to-equity swaps, and the latter should be restrained from recklessly issuing bonds and blindly expanding Public-Private Partnership (PPP) projects.
Fourth is financial governance. Financial system reform should be accompanied by adequate regulations and supervision, and the securities market should be regulated, with speculation controlled. Financial innovation should also be standardized to prevent an Internet finance bubble from forming.
Fifth, control of monetary policy. A recent report by China’s central bank examined the country’s financial cycles, finding that basing macro-control on an economic cycle that centers on the price of commodities will not address systemic financial risks. The report established that the Peoples’ Bank of China will move from a relaxed monetary policy to a prudent one, a significant change.
If the Chinese economy is to reach a new level in the next three decades, it must shift away from a model driven by low-cost economic factors to one based on innovation. The best way to prevent and mitigate financial risks is to vigorously develop the modern service sector and high-tech industries, while at the same time reorienting financial services to the real economy