The Taiwan Banker NO.95106.11 / writer: Lin Che-hung
China Focus: The 19th National Party CongressChina's new Five-Year Plan focuses on transitioning from high-speed growth to high-quality growth
From October 18-24, the Chinese Communist Party held the 19th National Congress in Beijing. While this Congress did not see any major changes in ideology, it nonetheless has important implications for China's future development. In total, more than 3,000 Chinese and foreign journalists attended. Some observers of China's 19th National Party Congress have focused on President Xi Jinping's centralization of power - which is a shift from the collective leadership style favored by PRC rulers since 1978. Yet there was much more to the Party Congress than Xi's alleged return to one-man rule. The people appointed to the Politburo and Xi's speeches give us important signals about how China will evolve in the next five years or even longer. High-quality development will replace the pursuit of high GDP growth During a speech he delivered on October 18, China called for China to become a "modern and strong socialist country" by 2050. The first step in this endeavor will be reaching the status of a "moderately prosperous society" by 2020. To determine whether China accomplishes this objective, GDP growth will need to double by 2020 from its rate in 2010. From 2018-2020, China's GDP only needs to grow at an annual rate of slightly above 6.3% and it will achieve this short-term goal. With regard to mid and long-term goals, Xi did not mention achieving specific GDP growth targets. Rather, he emphasized strengthening technology and culture, developing the legal system and improving China's overall environment. This shows that Xi is determined to link China's progress with metrics besides GDP growth. In the 19th Party Congress report, Xi said that China has transitioned from a period of rapid growth to one of high-quality growth. He emphasized that China will in the future pursue reform that is high quality, efficient and robust. Further, China will deepen supply-side structural reform and elevate its position in the global value chain. China will also continue to open its markets to the world, Xi said. Additionally, China will step up its environmental protection efforts, Xi said. Those will include building the green economy, resolving environmental problems and reforming environmental protection systems. Xi believes strongly in the importance of protecting the environment; he said that ensuring the health of the environment benefits not only people living today, but also those of many future generations. The banking industry will open up further, but oversight will tighten In 30,000-word report, only about 100 words are dedicated to finance. That part of the report emphasizes deepening reform in the financial system, strengthening the actual economic ability of financial services, promoting healthy development in capital markets and a sound currency policy, increasing the ratio of direct financing, and deepening interest and exchange-rate market reforms. China should develop a sound system of financial supervision to manage systemic financial risk, the report says. In a limited number of words, China's main financial policy goals for the next five years can be clearly seen. During the 19th Party Congress, China Banking Regulatory Commission chairman Guo Shuqing said that China's banking industry would be further opened up, attracting much attention from market observers. Currently, there are roughly 1,400 Chinese banks in 63 countries and territories. In China, foreign banks have set up 1,100 branches in 69 cities. While the overall development of foreign banks in China is stable, over the past decade, their share of the market has fallen to 2.4%. Increasing competition in the local banking sector will benefit domestic banks, encouraging them to optimize operations, Guo said. From what we saw in the 19th Party Congress, it seems that China's banking industry will be more open to foreign competition in the future. Guo said that China would give foreign banks "more room" for business scope and equity ownership in the future. This is in line with what the work report said: "Openness brings progresses, while being closed hinders it. China's door will not be closed; it only open further." Yet while announcing how the banking sector will be more open in the future, Guo emphasized that overall supervision will be stricter. Law enforcement will also be stricter. Risk and conflict can be resolved Guo said, but that requires hard work from all parties, and he hopes that everyone can understand that. Guo's announcement is widely applicable within Chna's financial industry, and follows a recent report calling for the construction of a sound financial supervision system in which systemic risk is avoided. There are numerous areas of the Chinese financial system where systemic risk is high, such as wealth management, shadow banking, local government debt, the alleged property bubble and cross-border financing. Meanwhile, strengthening supervision over the idle capital in the financial system has a relatively minor impact on the economy. Guo also said that in recent years China's banking industry has diversified its holdings. The next step is to deepen banking industry reform, and enhance corporate governance. He pointed out that at present the structure of some banks allows certain shareholders to conceal their actual holdings in the bank. Looking ahead, the China Banking Regulatory Commission will pay careful attention to the structure of banks' boards and independent board elections. Meanwhile, China Securities Regulatory Commission chairman Liu Shiyu said that in the next few years China will strive to avoid financial risk, notably that posed by local government debt. At the same time, China wants to strengthen key aspects of its financial system, such as the shortfall in capital markets. China must work to achieve market optimization, continue pushing for reform, and develop a multi-tiered capital market system that is competitive globally, he said. Lending will slow downZhou Xiaochuan, China's outgoing Central Bank chief, has warned that China's financial system is becoming more vulnerable given high levels of debt. With that in mind, China must avoid a "Minsky Moment," a sudden collapse of asset prices following a long period of growth. This is typically caused by currency or debt pressures. Speaking at the 19th Party Congress, Zhou said: “If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment," named after the economist Hyman Minsky. With all the talk by top regulators about avoiding financial risk, it is clear Beijing is concerned about the issue, even thought it does want to continue opening up its financial sector. During a national financial meeting in July, Xi Jinping said: "Finance is one of a nation's core competitive strengths and a ensuring the safety of the financial system is important for national security." The financial system is a basic system in the development of economic society, he said. Based on the 19th Party Congress Work Report and talks held by top financial regulators during the meeting, China will deleverage as overall lending slows, said Wang Tao, UBS's head of China economic research, adding that this policy is in line with an overall increase in oversight of the financial industry. The RMB exchange rate will remain in a stable range While the 19th Party Congress Work Report mentioned exchange rate reform, it is not expected to happen just yet. Zhou Xiaochuan has said that China's decision to allow the RMB to float will depend on supply and demand in the market as the currency becomes more widely used. This will be a long-term process. Zhou emphasized that right now the time is not right to let the yuan float; it is not the focus of the People's Bank of China. The current exchange rate of the yuan is stable compared to the past, according to People's Bank of China Deputy Governor Pan Gongsheng. The Chinese currency is experiencing two-way fluctuations and market expectations are stable for its future direction, he says, adding that China will gradually open its capital account in the future. Thus, neither allowing the RMB to float nor opening the capital account are currently the focus of the People's Bank of China. Rather, the PBOC will concentrate on maintaining a stable exchange rate and capital flows. Word bank – Minsky moment A Minsky Moment is a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures. The theory is named after economist Hyman Minsky. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money.