Increase the Role of Direct Financing to Combat Debt: Chinese Central Bank


An opinion piece published by the Chinese central bank’s official news publication has called for China to expand its use of direct financing in order to deal with copious volumes of debt in the real economy.

The article by Wen Xinxiang (温信祥), secretary of the People’s Bank of China’s Monetary Policy Committee, pointed to the need to raise the share of direct financing and equity financing especially in 2018, as well as expedite the healthy development of a multi-tier capital market in order to more effectively provide funds to the real economy.

“At present the debt ratio of China’s real economy is quite high, and only by developing equity financing will it be possible to truly resolve the problem of leverage, and effectively alleviate the issue of financing being both difficult and expensive (for enterprises).

“If we want to reduce the debt ratio at the source, the key will be to improve long-term mechanisms for the conversion of savings into equity investment, and provide capital funds to the real economy by vigorously developing equity financing .

“[China must” improve market infrastructure, expedite the healthy development of a multi-tier capital market, and raise direct financing’s share of social finance.”

Wen pointed to the need to expand financing channels for the real economy, expedite the formation of social capital, and pragmatically make use of the role of financial markets when it came to stabilising development, making structural adjustments and expediting reform.

His article also addressed the issue of China’s “twin pillar” central bank policy framework, comprised of both monetary and macro-prudential policy.

Wen said that the People’s Bank of China would strengthen coordination between monetary policy and financial regulation, further improve the macro-prudential policy framework, strengthen macro-prudential management of shadow banking and real estate finance, and strengthen risk monitoring and prevention in a slew of areas including corporate debt risk, changes in bank asset quality and liquidity; real estate markets, online finance, cross-border capital flows and cross-sector and cross-market operations.

Wen said that maintaing rational and stable liquidity is essential to steady monetary policy and the prevention of the onset of systemic financial risk.

Because financial risk frequently manifests itself as liquidity risk, it will be necessary to strengthen regulation of the liquidity risk of financial institutions and financial markets, clarify the fact that financial institutions are agents for the management of their own liquidity risk, and push for financial institutions to avoid excessive liquidity risk arising as the result of the excessive pursuit of growth and scale.