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Financial Reform May Continue at a Slower Pace

注:本文为笔者应邀为Bloomberg Brief撰写的十八届三中全会专题评论文章,已于2013年11月14日在Bloomberg Brief发表。转载请务必注明出处。

The third plenum was expected to set the direction and principles for financial reform. Defying market expectations, the communique released after the four-day meeting made no direct mention of the subject.
In the past, China's financial model was a key engine of growth. Interest rate regulation and capital account control channeled funds from the household to the corporate sector. The undervalued exchange rate helped boost export growth. State-owned commercial banks played a central role.
That approach also had costs. Cheap credit fueled over investment and low returns to savers reduced income for households, denting consumption. An undervalued yuan encouraged investment in manufacturing, at the expense of the more job-creating services sector.

To facilitate China's transition to domestic-demand oriented growth, Beijing must accelerate financial sector policy changes. At a minimum that would include liberalization of interest and exchange rates, opening the capital account, and creation of more private financial institutions.

The communique made no specific mention of any of these areas. Instead, it stated the general intention to “strengthen the financial market system” and “achieve the free but orderly flow of factors between domestic and international market.”

The most likely explanation for the omission is that financial reform had advanced at a satisfactory pace so far, and top leaders deemed it unnecessary to delve into the detail in the communique. Reform will continue, though perhaps at a slower pace owing to the report's emphasis on the coordination and integration of all policy changes.
We can't discount the possibility that financial sector reforms have run into opposition, and the lack of consensus is the reason the communique is short of detail. If this is true, then financial policy change will continue to face opposition, uncertainty, and even stagnation.

If reforms are on track, the first half of 2014 could see a series of new initiatives.

China will still keep a ceiling on benchmark deposit interest rates in the short-term. Policymakers may implement three courses. First, establish a national deposit insurance company, setting the quota for each family at about 500,000 yuan. Second, liberalize longer-term interest rates (more than 5 years). Finally, issue more large-scale certificates of deposit linked to the Chinese currency and allow the market to determine the interest rate.

The People's Bank of China will maintain control of the daily fixing of the yuan exchange rate against the U.S. dollar. It might expand the daily fluctuation band of CNY/USD to plus or minus 2- to 3 percent from plus or minus 1 percent.

The PBOC may publish a timetable by which it will liberalize the capital account by 2015 and completely open it by 2020. After a heated debate between academics and policymakers over whether the central bank should accelerate capital account openness, the PBOC appears to have adopted a gradual and cautious approach. Governor Zhou Xiaochuan has said that even if the capital account is fully open, the PBOC will still monitor and regulate volatile short-term capital flow.

Development of the Shanghai free-trade zone will push forward additional reform. The establishment of the national deposit insurance company would be the prerequisite for the creation of private commercial banks. Dominance by large state-owned commercial banks is unlikely to face strong challenges in the short-term.

Overall, it seems likely that shifts in the financial sector will progress at a slower pace than anticipated before the third plenum. The tapering of U.S. Federal Reserve's quantitative easing program as well as the stress of commercial banks’ balance sheet means additional headwinds to reform.

Ming Zhang is a senior research fellow from Institute of World Economics and Politics, Chinese Academy of Social Science in Beijing

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