Supply-side Structural Reforms in Chinese Finance Sector to Drive Growth in Smaller Institutions

A leading domestic think tank says Beijing’s recent emphasis on supply-side structural reforms in the finance sector signals greater support for smaller institutions that are better positioned to drive financial inclusion.

A recent meeting of the Chinese Communist Party Politburo on improvements to financial services and the prevention of financial risk saw President Xi Jinping place unprecedented emphasis upon “the deepening of financial supply-side structural reforms.”

Key central government authorities including the the Chinese central bank and the China Banking and Insurance Regulatory Commission (CBIRC) subsequently reiterated this emphasis in public remarks from senior officials.

Wang Jian (王剑), a researcher from China’s National Institution for Finance & Development (NIFD), writes in Securities Times that financial supply-side structural reforms will seek to address prevailing imbalances in the Chinese financial system, including the channelling of an excessive volume of funds to local governments and state-owned enterprises (SOE’s), and insufficient funding for small businesses and private enterprise.

“The core goal of financial supply-side structural reform is to increase effective supply and contract ineffective supply,” writes Wang.

“It is easy to understand the contraction of ineffective supply – this is simply the ongoing strict regulation and control of finance and investment in excessively leveraged sectors, such as local government and state-owned enterprise.

“Increasing effective supply, however, is likely be the exact opposite of supply-side structural reforms in the industrial sector over the past several years, which saw market share concentrated towards high-quality leaders.”

Wang writes that increasing effective supply in the financial sector will involve the provision of more funds to high-quality small, medium and micro-enterprises, which will will entail the creation of more “high quality small, medium and micro financial institutions.”

“The most practicable method under current technical conditions is to appropriately increase small, medium and micro-financial institutions, and raise the share of small and medium-sized institutions in overall financial supply,” said Wang.

“We recommend that in future regulatory authorities continue to unveil other measures that support small, medium and micro-financial institutions, such as differentiated capital supplementation and liquidity support, in order to more capable and vigorously lend support to small, medium and micro-enterprises.”

Wang further notes that the added-value of China’s financial sector accounted for 7.68% of China’s GDP in 2018, following a sustained increase over the past 15 year period.

“Since hitting a peak of 8.44% in 2015 it has fallen in the wake of a financial deleveraging drive, yet remains comparatively high in historical terms, and is higher than that of other major economies, in particular the United States and Japan.”

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