Finance at the Core of China’s Supply-side Structural Reforms: Yang Weimin

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A leading Chinese politician says that finance is the “most critical” part of Beijing’s ongoing supply-side structural reforms.

Yang Weimin (杨伟民), deputy director of the General Office of the CPC Central Leading Group of Finance and Economics, said that a focus on finance marks an “upgrade” of China’s supply-side structural reforms.

“Last year President Xi Jinping pointed to the need to unwaveringly maintain supply-side structural reforms as the main line,” said Yang on 23 March at the 2019 China Development Forum in Beijing.

“In February of this year President Xi also made mention of deepening supply-side structural reforms…I feel that there is arterial continuity between these two speeches, and can be interpreted as an upgraded version of supply-side structural reforms.”

Yang says that the supply-side structural reforms first mooted at the central economic work conference held at the end of 2015 have achieved marked success over the past three years, especially with regard to the removal of industrial overcapacity and declines in the macro-leverage ratio.

According to Yang recent downward pressure in the Chinese economy is a short-term reflection of structural problems accumulated over the long-term.

“For example, economic deceleration is primarily industrial deceleration, while the demand structure has already undergone major change,” said Yang. “Industry has yet to fully and appropriately adjust to the demand structure, and the industrial structure is also quite rigid.”

Yang highlighted three focal areas for the upgrade China’s supply-side structural reforms:

  1. Expansion of supply-side structural reform, which includes but is not limited to the accelerated clearance of zombie enterprises. China will need to “uphold structural deleveraging, reductions in taxes and fees, the establishment of long-term effective real estate mechanisms, and operate a rule-of-law-based commercial environment in accordance with the principle of competitive neutrality.”
  2. “Using reform as the method, focus on strengthening the vitality of micro-actors, and drive reform of related areas.”
  3. A focused push for financial supply-side structural reforms. “The root cause of structural imbalances is the distorted allocation of factors of production, of which finance is the most critical, because finance serves as the arteries.”

Yang says that in recent years Chinese bank loans have undergone “the two declines and three rises” (两降三升), referring to a large-scale fall in the share of lending to manufacturing and private enterprises, and a sizeable increase in the share held by real estate, the financial sector and personal mortgages.

According to Yang financial supply-side structural reforms will involve adjustments in three areas:

  1. Market structure. “[We] need to vigorously develop direct financing and in particular equity financing, and accelerate the creation of a standardised, transparent, open, vigorous and resilient capital market.”
  2. Bank structure. “We need to establish a multi-structure differentiated banking system with broad coverage; increase the volume and business share of small and medium-sized financial institutions, [and] increase the number of private banks and community banks.”
  3. Product structure. “We need to actively promote personalised, bespoke, differentiated products; expand the collateral scope, and determine loan terms based on the lifecycle of the various products of enterprises, as opposed to having enterprises adapt to the loan terms of banks. We need to improve due diligence disclaimer systems within banks, establish incentive mechanisms, develop financial products where real enterprises and banks jointly bear risk, and develop products that suit private enterprise and small and micro-enterprise.”

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