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Many thanks to the President for introducing me.
Previous statements about the first step were a great platform
for my speech about the second step. I, as a frontrunner, would like to
talk about the state of monetary and banking and the future financial reformation.
Whether China, after the Euroland happening,
becoming the third economic state of financial crisis,
due to BRIC economy confronting with big pressure from last year,
caused a bitter controversy and attention from us all.
To synthetically judge about the state of China's monetary and banking,
Renmin University of China, where I'm at, has specially made Chinese Financial Stress Index.
The Chinese Financial Stress Index was considered in two ways.
The first point, as you know, is that financial crisis started
from the uneasiness of macroeconomic.
So the exact research of financial instability gave help
for us to predict the degree of macroeconomic uneasiness in the future.
Second point is that China's macroscopic management of economy
especially gave help toward the prospect of macroscopic economic policy.
This left a huge margin in the work of follow-up policies.
If so, the Financial Stress Index is showing the uneasiness of financial main functions
not the overall state of financial.
At the same time, it emphasizes the dynamic points of view.
Through the dynamic points of view, whether financial stresses are
currently formatted or occurred will be judged.
At the same time, its general functions are scientifically comprehending the process
and movement of the overall financial system, and to let the public know
if risk factors in concern nations are piling up
or how much are piled up, since the financial crisis.
Followings are the 5 basic indicators of ways to judge financial crisis,
by adopting valid and simple principles.
The first is 'total social financing' that assesses the total degree of system bubble.
Second is 'investment index', considering the degree of business leverage.
Third is 'business leverage', measuring the degree of loan bubble.
Forth is 'level of the interest rate gap', counting the risk trend of bank system.
Fifth is property prices and stock price, considering the degree of devious asset cycle.
First of all, it indicates the all-item indexes by calculating degrees that are deviant
from each index and dividing the index through quantifiable work.
By looking at the big picture, the Financial Stress Index leads shortage of
GDP and CPI through the past 10 years, from 2002 to 2012.
Therefore, we can predict the balanced conditions of macroeconomic
by the Financial Stress Index.
Microscopically, this blue line indicates the Financial Stress Index.
It has mostly led PMI and BCI for the past 10 years.
So, with financial quotient,
we can microscopically predict the state of business production.
If we judge the foreseeable future state of monetary and banking
with this index, then we could get these three following conclusions.
Firstly, since the fourth quarter of 2010,
the fall of financial crisis from 2003 upward is the longest.
Secondly, the fall of FSI indicates that we got out the most of the past danger
caused by automatically controlling the market.
This means that the systematical risk
in the next step of China's finance has fallen.
Thirdly, the driving force of this fall is big because it had a long time duration,
and for two more other reasons.
Spontaneously straightening the excessive extension of credibility
from 2009 upward is the first cause.
The second major reasons of the drop in real economy recession and
effective demand loan, already mentioned in the first session,
were because of Chinese economy mostly had a sharp raise
in core cost price during the past 10 years.
The costs of workforce have increased to 78 percent during 2002 to 2012,
and this includes 236 percent of average land price, 121 percent of energy,
the increase in 67 percent of average raw materials costs,
and 45 percent of tax and related charges.
In other words, CPI has increased to 31.2 percent and PPI to 36.1 percent
during the past 10 years as the core cost jumped.
So, as the cost burden of business increased,
the burdens of profit growth also have greatly increased.
If so, we, in the next following 5 types of cost, have relatively got a large burden.
One is the total raised width of Renminbi reaching 34 percent after July 25th, 2005.
The prime cost of loans are same as adding net profits of 16 corporations
among Chinese corporations with profits of 2,280 corporations.
It raised to 39 percent in 2010, 45 percent in 2011, and 53 percent in 2012.
So the cost of funds actually had the biggest jump.
Next is the logistical cost.
It shares 20 percent of China's GDP and we can see that
this is twice as high then the level of developed countries, sharing 10 percent.
Next is the government funds of China.
The supported population of China is approximately over 53 million.
So a support coefficient is one to 25.
This is a quite high level for a developing country.
Next is the cost of environmental protection.
The fund of environmental protection
has been rapidly increasing during the past several years.
In other words, now is the time for China to exchange environment with profit.
So these kinds of extreme raise in tenth major cost
have put the real economy of China in trouble and became the cause of
decrease in effective demand loan of real economy.
FSI can judge the future state of economy in two aspects.
One can be identified in technique section
as FSI already reaching the ground in the late 2011.
So, the index is currently in appeasement. What I can say now is that
we are in a reraising level of financial index and absorbing financial risks.
It is expected to increase to a level, over zero, by the end of this year or early next year.
The costs of asset market are already showing signs of mitigation.
At the same time, the credibility and amount of money of bank will be stabilized
and will maintain its proper growth.
If so, the major reformation in factor market of production will increase
Small Business Enterprise activation.
Moreover, adjustment of economic structure will draw
a stable rate of long-term growth overtime.
Clearly, the new government does not simply expect for an increase
in the speed of economic growth.
They aim for 'the quality of economic growth'.
By this, the core value of Chinese financial is
aiming for improving the service quality of real economy.
In these situations, there are five structural problems in Chinese financial section.
First problem is financial 'phenomenon of real economy secession'.
Many places want to gain profits from asset bubble.
Second problem is the division of financial market.
Third problem is the high-degree of homogenization in bank and finance facility.
Fourth problem is the endless debt accumulation of local government.
Fifth is the supervision of management of risk factors
in shadow banking system and private loan.
To solve these five basical problems of structure, in the next 10 years,
specifically the 10 years of the new government,
China should reform seven types in monetary and banking section.
One is completing the interest rate marketing stage by stage.
Second is quickly completing the exchange rate marketing.
Third is solving the exchange problem in jen-min-pi account.
Forth is allowing the overall management of financial organization.
Fifth is constructing a diversified financial market system.
Sixth is having monetary policy that could stabilize cost and finance.
Seventh is constructing the frame of policy that considers efficiency and stability,
and prevents systematical risks of finance, in a macroscopic and careful way.
and prevents systematical risks of finance, in a macroscopic and careful way.
In other words, after 10 years, Chinese strategy and goal of development
and reformation in the banking sector
will have high efficiency, stability, and opening of modern financial system.
The monetary and banking policy is divided into two aspects.
One is the three polices in stability aspects of macroeconomics and finance.
First is stabilizing the value of every mortgage
and distraint goods of China's financial assets.
Currently the foreign currency loan of the bank is about 7 trillion.
Off-book trade is about 5 trillion and shadow banking system has 2 trillion.
The financial asset is altogether about 1.4 trillion.
Then mortgages of real-estate, mainly, need to maintain stability
to avoid the drop in value.
Second is stabilizing the value of renminbi for medium-and short-term
to reduce the debt of national market by blocking mass reverse of foreign capital,
and systematically maintaining the rise for long-term.
Third is that government investment should take the lesson from 2009
and proceed policy enforcement in a way of 'Squeezing toothpaste out'.
This should not be done at once.
Because, the government investment is important for stability of state
and needs a long-term regulation.
Because earning rates are not high when the term of government investment is long,
the investment proportion will instantly increase
and the whole burden of finance will increase.
When solving structural problem, based on core values of finance,
the most important tasks in financial section are the in depth fusion and
a sweeping improvement of efficient capital placement.
There are three major problems in here.
First problem is that China needs to try hard to break
periodical debt of Chinese company.
As you all know, China is in the development stage of heavy chemical industry.
They are in high growth, high investment, and high debt of companies.
This is the practical growth model of a company.
So the economic growth will reach the bottom caused by the high raise
in the debt percent of business investment, and will aim for the regrowth of company
overcoming debt situation of excessive corporation,
depending on economic stimulation policy.
As the picture shows, the current debt percent of business assets is high.
How should we solve it for this time?
The existing policy of 'conversing the amount of bank loan into stock'
and the policy of government expanding capital policy should not be used.
At the same time, developing the current low-efficient stock market in China is needed.
I would also suggest the development of 'direct investment market'.
There are five ways.
First is an active policy of shareholding investment fund.
Second is industrial investment fund.
Third is direct investment of insurance fund. Forth is direct investment to stock firm.
Fifth is trust investment for interests' protection.
These five ways of direct investment market, as Chinese financial markets are
structurally optimized, might open a new effectively supporting path
of massive company capital in a short term.
So, during this process, we should foreignly open the capital.
Many foreign companies, including Korean companies,
will someday have a chance of direct investment in Chinese financial markets.
The other way is lowering financial charges of real economy.
Simply speaking, there are six ways to do this.
First is a proper control of loan.
Currently, the regulations toward the scale of the credit are a bit strict.
This kind of blocked normal credit loan will be done by off-balance sheet
business or become a work of shadow banking system.
Small business will be damaged as the debt piles up and the interest rate gets higher.
Second is lowering the lending interest rate.
The current lending interest rate of China for 1 to 3 years is 6.15 percent.
According to my calculations, the actual debt of
company is 1 percent higher than compensation rate on operating assets.
By seeing the continual drop in PPI, during the last two months,
we think that we have time for the interest to decrease.
Third is to fully know the Chinese interest rate marketizing.
The marketizing of Chinese interest rate will be proceed step by step.
Currently, marketizing of lending interest rate is already fulfilled.
Marketizing the interest rate of savings is very important.
The question is, whether to put a ceiling on it.
I, however, suggest to seek for deliberate and stability.
Because, two of Chinese financing systems share 80 percent.
Business loans show a high level, 80 percent, of dependence on bank load,
and bank loans show 80 percent of high dependence on savings.
So if the interest rate of savings keeps speeding up,
then small business needs to bear a higher interest rate.
Fourth is conforming norms and managing credit loan market beside the bank.
Mostly there are six ways to raise funds
from shadow banking system and private system that are entrusted loan, credit loan,
rent loan, small company loan, fake loan, and private loan.
They are making a proposition of unifying them to a bigger financial system.
In the past, there were lots of debates, for a while,
about who would do the supervision of management.
If we can't find the right subject for supervision of management then
I suggest that the Central Bank should be in charge.
Fifth is accepting loans outside of the premises.
Because loans inside of the premises are costly, the value of renminbi is high,
and the US, Japan, and Germany are imposing low rate of interest.
So loans outside of premises cost less than the inside loans.
However, as our Bank Inspection Board increased the charge of managing
and overseeing, there are limits on the rate of savings and loans.
So there are limits on actual loans outside of the premises.
I suggest that we should accept in some degree.
Sixth is lowering the cost of managing and overseeing of the China bank.
Current rates of capital adequacy are 10.5 percent and 11.5 percent.
By adding loan-to-deposit ratio and legal reserve ratio, the rate definitely is higher.
The rate will decrease when following the Basel Accord progress.
Lastly, financial resources that are fully engaged
with real economy in financial section are needed.
We need to boost merger and acquisitions to get rid of spare production.
The first is bank lending more money for M&A.
Currently, foreign countries give high supports for business M&A.
However, M&A of the domestic market are still little.
Second is to create comprehensive industrial marketing
by developing commercial funds and putting spare production together.
Third is preventing regional protectionism of local government under competitive M&A.
This extremely restricts structural adjustments in real economy.
Forth is promoting M&A of commercial bank.
Currently, there are 3,747 corporate finance organizations in the bank of China.
There are 3.4 million employees.
Phenomenon of overlapping structure and homogeneous business are extremely severe.
So corporate finance organization with lower service level and efficiency started a price war,
and this generally caused a waste of Chinese financial resources.
Therefore, we should help to raise M&A between banks,
make the best of a bank, and specialize it.
We need to increase the overall efficiency of a bank,
and support the restructuring of real economy.
Therefore, during this process, we need to allow foreign capitals
in Chinese market and let them participate in M&A between commercial banks.
in Chinese market and let them participate in M&A between commercial banks.
This means that Korean financial funds will also have a huge chance in the future.
This is all for today. Thank you.