Giving Better Play to Functions of Financial Sector in a Progressive...

Title:Giving Better Play to Functions of Financial Sector in a Progressive, Stable Manner
 

Xi Jinping，general secretary of the Communist Party of China (CPC) Central Committee，pointed out that security is the prerequisite for development while development is the guarantee of safety，hence we should adopt a holistic approach to development and security. Facing the accelerating evolvement of transformations rarely seen in a century，the effective functioning of resource allocation，risk management，expectation guidance，among other basic functions of finance，is essential for economy to maintain resilience with stronger vitality. This is particularly so when in a complex environment since 2022 due to the collective impact of the once-in-a-century pandemic，conflict between Russia and Ukraine，and global inflation.

We will continue to fulfill the duties of financial markets to further stimulate the vitality of financial resource allocation. The fundamental role of the financial sector is to serve the real economy，which is an importance experience in keeping to the path of financial development with Chinese characteristics. Being the lifeline of the real economy，the financial sector underpins the real economy when it comes to vibrance and stability. Finance plays an irreplaceable role in China’s economic development. Under the triple pressures of shrinking demand，supply shocks，and weakening expectations，we must do a good job in the vanguard role of finance，unleash the dynamism and potential of financial factors，give full play to the core role of finance in modern economy，and ensure a good performance of finance’s price discovery and i0ntertemporal resource allocation functions. These efforts will help the economy performs within an appropriate range. On the one hand，we will boost financial markets and further open up the funding channels from financial institutions to the real economy. Doing so will bring about more efficient resource allocation，lower funding cost in the real economy，and stronger competitiveness of industrial finance. Efforts must also go hand in hand with ensuring the smooth operation of the capital market，streamlining market demand and supply relations and risk pricing mechanisms，and channeling the flow of financial resources into technology innovation，green and low-carbon development，and advanced manufacturing，among other fields，for better high-quality economic development. On the other hand，we will encourage financial markets to create products and services that fit in with the demand of technology，small businesses，and sunrise industries. Based on the risk-averse principle，we will guide the financial sector for maturity transformation and capital allocation among entities，industries and markets，foster positive interaction between financial operation and economic development，so as to better serve the supply-side structural reform and high-quality economic development.

We will ensure well-functioning risk management in the financial sector to enhance the capability in managing intertemporal risk and return smoothing. Risks accompany finance，hence risk management is an important function of the financial sector. From the perspective of long cycle，risk management features in making up for possible shortages with surpluses and staying keenly alert to potential dangers. Currently，due to the impact of Russia-Ukraine conflict，global financial risks occur in high incidence. There has been a surge in commodity prices. On March 7，the price of wheat closed at historic high since 1972 on the Chicago Board of Trade. On March 8，Brent crude futures settled at the highest level since 2009. On March 25，the 10-year U.S. Treasury yield hit a fresh two-year high of 2.5% since June 2019. The DAX index fell 9.3% year-on-year from January to March this year. Given the rapid development of financial globalization and fintech，financial markets can have a quick impact on expectations as a key channel of spreading risks across national borders and markets and become a constraint on the stable and sound operation of China’s economy and financial sector. In such a complex risk environment，we should make good use of finance as an economic stabilizer and risk “market maker” to effectively hedge against，absorb，and transform risks and contradictions accumulated in economic operation，while creating an enabling financial environment to ensure “six priorities” and stability in six areas for steady economic momentum. In terms of financial institutions，a necessary guarantee is to enhance their capability in risk identification，necessary risk preparedness，and intertemporal risk absorption. In terms of rules and regulations，we should maintain a market-oriented，law-based principle，improve the rule of law in the financial sector，optimize the regulatory system，and ensure a robust balance sheet of financial institutions. Accordingly，we will eliminate priority risk in a targeted manner，avoid the escalation of individual，local risks into overall，systemic ones.

We should hold the key to expectation management to create a financial operation system featuring macro-guidance and smooth micro-response. Micro decision making in contemporary economic operation comes down to expectation. The efficacy of expectation management determines the stability of financial markets. In history，the Great Depression in the 1930s fueled the Keynesian Revolution that ushered humanity into an era of macroeconomic control. Since then，the counter-cyclical aggregate demand management has been an importance component of national macroeconomic management capacity. Stagflation in the 1970s led to the rise of monetarism and rational expectations school. At that time，regulatory agencies paid more attention to the self-stabilizing function of market mechanisms and tended toward the simplification of policies and rules. The Savings and Loans Crisis in the 1980s resulted in the implementation and promotion of Basel I，which marked that micro-prudential management with capital adequacy regulation at its core became an essential element of financial regulation. The financial crisis of 2008 pushed forward a range of regulatory reforms that targeted on both economic and financial stability. In essence，all theoretical innovations and policy reforms are rooted in expectation management. The expansionary fiscal policy in the 1930s aimed at stabilizing economic expectation. the regulatory reforms in the 1980s were intended to stabilize expectations on the robustness of financial institutions. And the monetary policy framework optimizations in this century are designed to stabilize expectations on financial markets. Arguably，macroeconomic management “soft powers,” such as forward guidance with expectation management at its core and communication with markets，are important indicators of financial modernization. Currently，to deal with complex and volatile economic and financial trends，it requires an expectation management system that features well-conceived macro guidance and agile micro response. This enables us to have Chinese wisdom and Chinese solutions in contemporary economic and financial management.

Modern economy is essentially monetary and credit economy. real economy and finance are closely connected as one. To do a good economic and financial job in the new era，we must adopt a systemic philosophy，make sound overall arrangements for domestic and international situations and for development and security. We will continue to improve our political judgement，understanding and execution，uphold the underlying principle of pursuing progress while ensuring stability，stave off systemic risks，boost marketization of the financial sector and law-based reforms according to the new development pattern. We will also speed up high-quality economic development，effectively prevent and control financial risks，deepen financial reforms，so as to write a new chapter of high-quality development of China’s financial sector in a new era.