Removing financial risks to build a modern society

The Central Economic Work Conference held this week made it clear that high-quality development is necessary for building a modern socialist country. And to achieve this goal, it is necessary to further deepen the structural reform of the financial supply side, optimize financial supply, and better serve the realistic needs of economic and social development.

In terms of quantity, it is necessary to create a favorable monetary and financial environment to promote high-quality economic and social development. It is also necessary to maintain prudent monetary policy and pay greater attention to cross — and countercyclical adjustments. In the long run, especially during the economic transformation period, China needs to adhere to prudent monetary policy, maintain sufficient liquidity, reduce the financing costs, and moderate monetary credit growth.

On the structural front, it is necessary to optimize the structure of funds supply, while the financial industry needs to focus on achieving the long-term goals proposed by the 20th National Congress of the Communist Party of China and strengthening the provisions of high-quality financial services.

There is also a need to allocate more financial resources to promote technological innovations, advanced manufacturing and green development, and support small and micro enterprises, in order to achieve innovation-driven high-quality development and strengthen national food and energy security.

To achieve these goals, greater efforts should be made in five major areas — science and technology finance, green finance, inclusive finance, pension finance and digital finance — to boost the real economy.

First, it is necessary to improve the capital market, increase the proportion of direct financing and optimize the financing structure.

Second, there is a need to improve the positioning of financial institutions, ensure that competition is conducted in an orderly manner, reduce potential market risks, and more effectively leverage the comparative advantages of various institutions to serve the interests of the real economy.

And third, measures have to be taken to strengthen supervision and prevent systemic financial risks. Previously the Central Financial Work Conference emphasized the need to "comprehensively strengthen financial supervision and effectively prevent and resolve financial risks", so as to address issues such as "persistent financial chaos and corruption problems, and weak supervision and governance in the financial field".

As for intensified supervision, its goal is to "improve the effectiveness of financial supervision, legally include all financial activities in supervision, comprehensively strengthen institutional supervision, behavioral supervision, functional supervision, penetration supervision, and continuous supervision, eliminate supervision gaps and blind spots, and crack down on illegal financial activities".

China's risk disposal and prevention mainly focus on local government debt, real estate enterprises, and small and medium-sized financial institutions. Hence, the essential needs now are clearing the stock risks in a timely and orderly manner, and building a long-term mechanism to prevent and remove risks.

It is essential to "dispose of the risks of small and medium-sized financial institutions in a timely manner" by means of "early identification, early warning, early exposure, and early disposal of risks". The risks small and medium-sized institutions face include improper corporate governance, outdated internal control systems, weak risk control mechanisms and uneven qualifications of shareholders.

According to the State Council report on the financial work situation in October, it is important to "resolve the risks of high-risk small and medium-sized financial institutions in an orderly manner, promote mergers and reorganizations, and dispose of the risks in a stable manner", in order to prevent the spread of risks of individual institutions and create a localized financial crisis.

On the risks of hidden debts of local governments, a clear train of thought has been formed at the national level for preventing and eliminating the risks of local government debt by, among other things, optimizing the debt maturity structure and reducing the interest burden. Based on this, it is crucial to establish a mechanism for preventing and eliminating local government debt risks, and establishing a government debt management mechanism that is compatible with high-quality development.

In terms of specific measures, the systems and measures of the central and local governments should be leveraged to "optimize the debt structure of the central and local governments", so as to alleviate the pressure of local government debt.

In the long term, the fundamental solution to the problem of local government debt needs to start from institutional mechanisms, and adjustments and optimization of the fiscal powers of the central and local governments.

Besides, it is necessary to ensure the real estate market smoothly transitions to a "healthy cycle of finance" in order to eliminate all market risks. And to ensure the smooth transition, it is crucial to improve the regulatory system for real estate enterprises, strengthen macro-prudential management of real estate financing, implement differentiated policies to optimize local real estate regulation, take measures to boost housing demand, accelerate the construction of the "Three Major Projects" including affordable housing, and develop a new real estate growth model.

In the future, the focus should be on optimizing and adjusting policies to encourage financial institutions to provide more financing support for high-quality projects of private enterprises. And in addition to boosting demand in the real estate market, it is also important to optimize local real estate control policies through "differentiated measures according to local conditions", which in turn can help stabilize the demand, creating a better market environment for the high-quality and smooth development of the real estate market.

The author is deputy director of the National Institution for Finance and Development. The views don't necessarily represent those of China Daily.

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