Prospects for Financial Reform
Huang Yiping
Peking University
January 7, 2013 New York Stock Exchange
“New normal” of Chinese growth
Various estimates of Chinese growth potential
ADB & NSD
0.0
4.0
6.0
8.0
10.0
•
Three conditions that supported
Chinese growth in the past –
unlimited labor supply, low
production costs and rapid export
expansion – are all diminishing
•
The economy is transitioning
toward slower growth, higher
inflation, improving income
distribution, rebalancing of
economic structure and
accelerating industrial upgrading
•
But the key challenge remains:
can China avoid the middleincome trap? Financial reform
should be a necessary step
2010-20
2020-30
2011-15
WB & DRC
2.0
2016-20
2021-25
2026-30
CASS
2011-20
2021-30
Experiences of financial reform
Financial repression index for China, 1978--2010
•
•
•
China has been implementing
financial reforms since 1978. And
by some measure it’s probably
been half-way through the process
Financial reform in China has
been strong in building institutions
and growing volumes but weak in
liberalizing markets and improving
governance
The impact of financial repression
on economic growth turned from
positive in the 1980s and 1990s to
negative in the 2000s
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
1978
1984
1990
1996
2002
2008
Growing Shadow banking
Changing composition of total social financing
2,000 CNY bn
•
Non-loan financing exceeded 50%
of total social financing recently.
Shadow banking could be
CNY25trn and wealth
management product is about
CNY6-8trn
•
While this is consistent with the
government’s objective of
diversifying away from the banks,
it is also a step of back-door
liberalization of the interest rate
•
But growing shadow banking
businesses point to significant
(financial and debt) risks ahead
and also forces the government to
accelerate paces of liberalization
1,500
1,000
500
0
-500
RMB loans
Entrusted loan
Bank acceptance bills
Corp equity financing
Foreign currency loan
Trust loan
Corp bond financing
Others
Interest rate liberalization
Comparison of net interest margin (% points)
•
•
Growth of both government and
corporate bond markets, in depth,
liquidity and product
Increasing open market operation
to regulate interbank interest rate
Will net interest margin narrow or
widen? It may widen in absolute
terms but may narrow on
comparative basis
5 %
4
3
2
•
Deposit insurance system may be
introduced in 2013
1
•
Can banks survive the change –
shrinking books and increasing
competition?
0
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
•
US banks
HK retail banks
ICBC
Exchange rate flexibility
“Hot money” flows and PBoC’s fx purchase
100
CNY bn
•
Renminbi exchange rate may be
close to the equilibrium rate now,
judging from the current account
position
•
The central bank has reduced
intervention in the foreign
exchange markets, hoping to
introduce two-way movement
•
Accumulation of foreign exchange
reserves and demand for US
Treasury bonds should slow
•
The exchange rate may become
more volatile in the short term but
should continue to appreciate in
the medium term
80
Inflow
60
40
20
0
-20
-40
-60
*Non-FDI flow=Change in PBoC FX purchase-Trade
Surplus-FDI inflow
-80
Nov-08
Nov-09
Non-FDI flow*
Nov-10
Nov-11
Change in PBoC FX purchase
Nov-12
Internationalization of renminbi?
Use of renminbi in cross-border transactions
•
•
•
•
Basic convertibility within 3 years?
reserving rights to restrict volatile
flows, control money laundering
and resume temporary restrictions
900
CNY bn
800
700
600
Outward direct investment may
surge in resources, finance,
infrastructure and high/low end
manufacturing
International use of renminbi
increased significantly, due to
growing demand (US dollar +
Chinese economy)
But renminbi will unlikely rule the
world any time soon given its
emerging market economy,
financial system and politics
500
400
300
200
100
0
Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12
RMB trade settlement
CNH deposit
RMB FDI
RMB ODI
CNH loans
RMB QFII
Key takeaways
•
•
Financial reform is accelerating
and the new leaders may work on
a blueprint before Autumn
Regulations for shadow banking
could tighten in the near term
though interest rate liberalization
should continue
•
Implications for rest of the world:
•
Slowing reserve accumulation
may pressure treasury yield (and
the Fed’s QE policy?)
•
Opening financial markets should
provide new opportunities for
foreign funds and institutions
•
It is possible to see greater
exchange rate flexibility and basic
convertibility of the capital account
within 2-3 years
•
Outward investment may rise
rapidly, including direct investment
into the US resource, finance,
infrastructure and manufacturing
•
Renminbi will be increasingly used
in international transactions but
won’t become a major global
currency
•
Accelerated industrial upgrading
should redefine international
division of labor