The Information Office of the State Council held a policy briefing on the morning of Jan 23.

Pan Gongsheng, vice-governor of the People’s Bank of China; Wang Zhaoxing, vice-chairman of the China Banking Regulatory Commission; and Zhou Yanli, vice-chairman of the China Insurance Regulatory Commission attended the briefing.

Guo Weimin, spokesman for the Information Office of the State Council, hosted the briefing.

Guo Weimin:

Good morning, ladies and gentlemen, welcome to the second policy briefing of the State Council. Financial reform is an important part of China’s comprehensive reform as well as an interesting topic for the media. In a bid to help you to know more about the subject, I am glad to have Pan Gongsheng, vice-governor of the People’s Bank of China, Wang Zhaoxing, vice-chairman of the China Banking Regulatory Commission and Zhou Yanli, vice-chairman of the China Insurance Regulatory Commission here to brief you on background information and answer your questions.

Pan Gongsheng:

Ladies and gentlemen, friends from the press, good morning.

In 2014, facing very complex and changing economic and financial situations at home and in the world at large, under the leadership of the CPC Central Committee and the State Council, the PBOC has adhered to the principle of seeking progress while maintaining stability, carried out reform and innovation, deepened financial sector reform, promoted opening-up in a comprehensive manner, and enhanced financial sector support to the real economy, contributing to the sustained and sound development of the economy.

In the field of financial sector reform, we have followed the overall strategic arrangements of the 3rd Plenum of the 18th CPC Central Committee, worked actively and steadily to advance financial reform in vital areas and key links, and enabled the market to play a decisive role in resource allocation to a fuller extent. As a result, the vitality and dynamism within in the financial system was further released.

Pan Gongsheng:

First, the market-based interest rate reform and exchange rate regime reform was enhanced. The upper limit of RMB deposit interest rates was raised from 1.1 to 1.2 times the benchmark deposit rates. Maturity brackets of benchmark deposit and loans rates were reduced and simplified. The interbank certificate of deposit business made steady progress, and the space of independent pricing by financial institutions was expanded and their capacity of independent pricing enhanced.

In terms of exchange rate regime reform, the floating band of the spot trading price of RMB against the US dollar on the interbank foreign exchange market was expanded from 1 percent to 2 percent. The flexibility of the RMB exchange rate in both directions was enhanced. The PBOC has basically exited from regular interventions on the foreign exchange market.

Second, the cross-border use of RMB increased notably. In 2014, the combined volume of RMB settlement of cross-border trade, investment and financing reached 9.95 trillion yuan ($1.60 trillion), accounting for about 20 percent of China’s total cross-border

payments and receipts. Cross-border RMB receipts and payments have taken place between China and 174 countries. RMB clearing arrangements have been established in 10 countries and regions. The PBOC has signed bilateral local currency swap agreements with 28 central banks, with the combined swap facilities exceeding 3 trillion yuan. RMB has become the second most used currency for cross-border payment in China.

Third, the convertibility of RMB under the capital account made new progress. The pilot program of the Shanghai-Hong Kong Stock Market Connect has promoted the integration of the domestic capital market with the international market. The International Board was launched on the Shanghai Gold Exchange. Continued efforts were made to facilitate domestic financial institutions to issue RMB-denominated bonds in overseas markets, and support eligible foreign nonfinancial enterprises to issue panda bonds in China’s domestic market. Qualified overseas institutions have been granted access to the interbank market, while the pilot program of RMB qualified foreign institutional investors (RQFII) was expanded to 10 countries and regions.

Pan Gongsheng:

Fourth, the deposit insurance scheme has achieved substantive progress. The Executive Meeting of the State Council has passed the plan for implementing the deposit insurance scheme. The Provisional Rules on Deposit Insurance (trial) was released to solicit public opinion, and the soliciting period has reached a satisfactory conclusion. In addition, all preparatory work has been completed for the program launch. The preparatory work for the introduction of the program has been put in place.

Fifth, reforms on policy financial institutions proceeded smoothly. The Executive Meeting of the State Council has approved the reform plan of the Agricultural Development Bank, and specified the overall objective and major policy measures. Under the leadership of the PBOC, the China Development Bank has established a Housing Finance Department, enabling development finance to further support the renovation of rundown areas. More revisions and improvement have been made to the reform plans of the China Development Bank and Export-Import Bank of China.

Sixth, reform of the foreign exchange administration was deepened. Efforts were made to streamline administration and delegate powers, and transform governmental functions. Reform on the foreign exchange administration of trade of goods and services was deepened, and pilot programs under the capital account were advanced, such as discretional surrender of foreign exchange for capital funds and the centralized fund management of multinational companies. Trade and investment facilitation was further improved.

Seventh, the PBOC has improved and made innovation in financial services and management in the fields of financial surveys and statistics, payment and settlement, treasury management, banknote issuance, credit reference, anti-money laundering, financial consumer protection. Financial reform and innovation was carried out in the Shanghai Free Trade Zone and produced a valuable experience that can be copied and reproduced.

While deepening the financial sector reform in a comprehensive manner, the PBOC has reinforced monitoring of risks in vital areas and key links, coordinated actively with other financial regulators, and safeguarded the bottom line of nonoccurrence of systemic, and regional financial risks.

Pan Gongsheng:

The PBOC followed the essential requirement of the financial sector serving the real economy, continued a sound monetary policy, stayed focused and taken initiatives as called for, enriched and improved the mix of monetary policy instruments, and conducted fine-tuning and pre-emptive adjustments when appropriate, to provide a favorable monetary and financial environment for the development of the sector.

First, the aggregates of money supply were kept at an appropriate volume, which was neither loose nor tight. Based on economic performance and changes in liquidity of the banking system, the PBOC utilized an array of monetary policy instruments, such as Short-term Liquidity operations (SLO), Standing Lending Facility (SLF), to adjust the liquidity in the banking system. In the meantime, the targeted macro-control was strengthened, and the targeted reduction in the Reserve Requirement Ratio (RRR) was conducted on two occasions. By using the Medium-term Lending Facility (MLF), Pledged Supplementary Lending (PSL), and the credit policy supportive of central bank lending, the channels were broadened to provide liquidity to financial institutions, and a positive incentive mechanism was established to guide financial institutions to step up credit support to the agricultural sector, rural areas, and farmers, small and micro enterprises and renovation of rundown areas. In 2014, money and credit grew in a stable manner, and funding demands from the real economy were met.

Second, social financing costs were reduced. Together with the relevant departments, the PBOC adopted a series of policy measures to regulate the fees and charges of financial institutions and improved the performance evaluation mechanism of commercial banks. It also supported the development of credit guarantee and re-guarantee institutions, improved the financial infrastructure including the credit information system, promoted the construction of a multi-tier capital market, encouraged the development of financial institutions such as private banks, and established a sound long-term mechanism. On Nov 22, 2014, the benchmark deposit and lending rates were cut in an asymmetrical manner, with a purpose of lowering market interest rates and social financing costs. With the joint efforts of all parties, financing costs fell in some areas and regions.

Third, the credit structure was further optimized. The policy decisions and arrangements of the State Council on the financial sector supporting economic structural adjustment, transformation and upgrading were earnestly implemented. Credit policy guidance was strengthened, and innovation was made in credit policy adjustment tools to guide financial institutions to revitalize stock credit resources and make good use of incremental credit resources.

Financial support was enhanced to the key industries and fields such as the agricultural sector, rural areas and farmers, micro and small-sized enterprises, renovation of shantytowns, railway, shipbuilding, integrated circuits, and enterprises’ going global strategy, among others. Financial services were provided to help resolve the severe overcapacity problem.

Fourth, direct financing channels have been broadened. Adhering to the principle of market-oriented reform, efforts were made to accelerate the product innovation in the interbank bond market, to promote the development of the SME Collective Notes, launch the Project Revenue Notes, the Merger and Acquisition Bonds, the Low-carbon Bonds, and further expand the credit assets securitization pilot program.

Pan Gongsheng:

This year is crucial for the comprehensive deepening of the reforms as it is the beginning of fully promoting the rule of law, and the concluding year of the “Twelfth Five -Year Plan”.

In the next stage, we will fully implement the decisions adopted at the Eighteenth National Congress of the Communist Party of China (CPC), the Third and the Fourth Plenary Sessions of the Eighteenth CPC Central Committee, and the Central Economic Work Conference. We will follow the principle of seeking progress while maintaining stability, take initiatives to adapt to the “new normal”, attach more importance to the transformation and adjustment of the economic structure, continue to implement sound monetary policy and focus more on the appropriate stance of monetary policy. We will also carry out pre-emptive adjustment and fine-tuning when necessary, vigorously promote financial reform and opening up, effectively guard against and defuse all kinds of financial risks, improve financial services and management, and promote sustained and sound economic growth.

In the medium to long term, efforts will be made to improve the financial market and institutional system to support the sustainable development of the real economy.

Efforts will also be made improve the sound, balanced and effective macroeconomic management system and monetary policy framework, establish and improve a highly efficient, forward looking, professional and market-friendly regulation regime.

The focus will also be on ways to create a comprehensive, efficient and inclusive financial service system supported by the development in science and technology, reinforce the financial safety net to forestall risks, strengthen global competitiveness of the financial sector, and provide an effective and convenient financial service to support the sound and sustainable growth of the real economy.

Wang Zhaoxing:

Friends from the press, good morning. I would like to take this opportunity to thank the media for their coverage of financial and banking reform and banking regulation. I will brief you on four aspects of it.

First, important progress was made in 2014 in encouraging private capital’s participation in the banking sector and initiating the establishment of private banks. These moves play an important role in diversifying China’s banking system and optimizing its financial structure. We will continue to push forward the process in an active and steady manner.

We can use “5+14+108” to summarize the promotion of private capital’s wider participation in banking and financial institutions in 2014. This represents that five private banks, totally run by private capital, have been approved to be established in 2014, and one of them has been approved to start operations.

At the same time, we approved the establishment of 14 financial leasing companies, consumer finance companies and the group branches, in which private capital has a majority share. We also approved the founding of 108 village and township banks, in which private capital plays a dominant role. All these were ratified to be set up in 2014.

Regarding the developing of financial inclusion, we improved financial services for micro- and small- enterprises as well as agriculture, farmers and rural areas, supported the construction of government-subsidized homes and the renovation of shantytowns. Achievements were made in financial services for water conservancy projects in rural areas. In these spheres, I think the improvement of financial services still faces an arduous task and has a long way to go. We will continue to work hard in this regard.

Wang Zhaoxing:

New and important progress was made in the wider opening-up of the banking sector as well as Chinese banking and financial institutions’ efforts to go global. We amended the Regulations of the People’s Republic of China on Administration of Foreign-funded Banks, further eased requirements for foreign-funded banks to set up institutions, run renminbi business and set up branches, and increased opening-up. We will continue to actively promote opening-up, support Chinese banks to go global and elevate their internationalization.

Under the increasing economic downward pressure, some sectors showed problems of overcapacity. When the economy faces multiple pressures, including restructuring, financial risks increased in some regions, sectors and enterprises, and bank nonperforming loans are growing.

The central government and regulatory departments have actively taken effective measures. Some risks have been resolved gradually. The risks of the whole financial system and the banking industry’s nonperforming loans are still under control. We have clearly realized that financial risk is likely to be an important factor affecting financial stability. Therefore, we will further improve and strengthen financial regulation to prevent risk. Thank you.

Guo Weimin:

Now let’s welcome Zhou Yanli, vice-chairman of the China Insurance Regulatory Commission.

Zhou Yanli:

Good morning, friends from the press.

The insurance industry has made remarkable progress in 2014. We’ve seen the best ever figures in all business areas. We’ve made the greatest achievements in history in terms of premium income, compensation, fund utilization, total assets, risk prevention, as well as serving the real economy, micro- and small- sized enterprises, and providing services related with agriculture, farmers and rural areas.

This progress was not just due to the Opinions on Accelerating the Development of Modern Insurance Industry released by the State Council, but also owes much to wide support from other parties.

The opinions fully display the insurance industry’s goals for 2020 as well as a series of supporting policies, helping to create a good environment for its development.

I’d like to cite several figures. Premium income in 2014 exceeded 2 trillion yuan ($321.2 billion), while insurance assets rose above 10 trillion yuan. As a result, the insurance industry has reached a new point.

I’d like to give more details about the industry’s reform in 2014 and how it has served the real economy.

First, breakthroughs have been made in the reform and innovative development of the insurance industry. In 2014, reforms were advanced on all fronts, generating new energy for further development.

Following are the details.

1. Pricing mechanism reform was steadily carried out. Plans have been made to reform the pricing of commercial vehicle insurance clauses and market-oriented reform of universal insurance rates.

2. Steady progress in insurance fund investment reform has also been made. Regarding investment products, infrastructure fixed income investment plans, equity interest investment plans, asset backed plans and investment portfolios have been developed. In terms of investment structure, more flexible structures such as share/debt combination and preferred stock are allowed.

3. The reform on market entry and exit is making steady progress. New types of institutions dealing with captive insurance and mutual insurance were encouraged. The China Insurance Regulatory Commission has drafted the Interim Measures for Mutual Insurance Institutions and improved the market-oriented exit guidelines. It also released the Administrative Measures for the Merger and Acquisition of Insurance Companies, introduced M&A financing and allowed the breakthrough of a 20 percent shareholding limit in mergers and acquisitions.

4. Reform on the regulatory system was carried out steadily. As you might know, the framework of the second generation of China’s solvency regulatory system (namely C-ROSS, China Risk Oriented Solvency System) has been basically set up. We plan to release all 17 main technical standards soon. We are also heading forward with the abolishment, revision and establishment of insurance industry-related regulations. In 2014, four administrative regulations have been revised and 4,798 normative documents have been abolished. The number of such documents has been cut by nearly 80 percent. The commission is also making efforts to streamline administration and delegate power to the lower levels, as required by the State Council. Sixteen administrative approvals have been, or are being, delegated or canceled.

Zhou Yanli:

Second, progress has been made in serving the real economy, especially in serving economic and social development and supporting agriculture, farmers and rural areas. The insurance industry has been actively engaged in and served the real economy, a role increasingly recognized by society.

1. Agricultural risk protection has been further improved. We have launched pilot programs for the target price insurance of agricultural products in 18 provinces. The China Agriculture Reinsurance Community was established and the National Agricultural Insurance Information Platform is being built, the first of its kind in history.

2. In terms of serving the construction of a social security system, by the end of 2014, life insurance has provided 195.6 trillion yuan coverage to hundreds of millions of people. A total of 13 insurance companies have conducted 373 pooling programs that offer insurance to residents diagnosed with major and severe illnesses, covering 650 million people in 27 provinces. The industry undertook and administrated basic social security programs for 55.15 million people, and provided micro insurance services to more than 70 million low-income people.

3. The industry has actively participated in social management. The CIRC, jointly with five ministries including the National Health and Family Planning Commission and the Ministry of Justice, issued Guidelines on Strengthening Medical Liability Insurance, clarifying the development goals of medical liability insurances. The CIRC also, jointly with the China Food and Drug Administration, drafted Guidelines on Carrying out the Liability Insurance of Food Safety, encouraging key industries to play a leading and exploratory role.

4. The industry also pressed ahead with the establishment of catastrophe insurance. We have made plans to establish the catastrophe insurance system and developed related products. Pilot programs have been launched in Shenzhen and Ningbo and Sichuan, Shaanxi and Yunnan provinces are also preparing programs.

5. The industry has provided financial support for economic and social development. As an important institutional investor of the capital market, insurance funds have been actively engaged in China’s major infrastructure construction and projects that benefit people.

This year is crucial for China’s comprehensive reform. It is also the last year of China’s 12th Five-Year Plan (2011-2015). The insurance industry will stick to the general tone of seeking progress amid stability, actively adapt to the new normal of economic growth, deeply implement the package of measures — unveiled by the State Council — for the development of the insurance industry. Driven by reform and innovation, the industry will try to realize the transformation from traditional insurance industry to an industry that provides modern services.

I’d like to take this opportunity to thank you all for your longtime support for insurance industry and insurance supervision.

Thank you.

Guangming Daily:

I would like to ask Vice chairman Zhou of CIRC a question of great concern to motorists. As you may know, companies which offer car insurance are facing losses and, at the same time, they are receiving frequent complaints from motorists. When will commercial vehicle insurance rates be reformed? And what benefits can customers get?

Zhou Yanli:

The reform of commercial vehicle insurance aims to give pricing power to insurance companies while giving customers the option to choose products they want to buy. We think this will make insurance companies more innovative. We are seizing the moment to promote this reform and a preliminary plan has been made. A pilot project will be started in Heilongjiang province, Shandong province, Guangxi Zhuang autonomous region, Chongqing municipality, Shaanxi province and the city of Qingdao; and we will roll out the reform in the rest of the country according to feedback from these test areas. Based on the experience, we will try and see that risk is matched by the premium so drivers who are unlikely to be involved in accidents will pay reduced rates. In a bid for better customer protection and more benefits for car owners, we will also broaden the scope of insurance protection, and a number of inappropriate provisions in current insurance contracts will be removed.

Consumer News and Business Channel:

My question goes to Vice-Governor Pan. Will the security purchase program of the European Central Bank affect China’s monetary policy?

Pan Gongsheng:

Thank you for your question.

The world is changing fast. Every day there is something new.

The European Central Bank launched a new round of quantitative easing yesterday. I believe everybody here has got the news.

There are some fundamental points about the program. For example, the purchase is expected to start in March and end in September 2016. But the time span of the purchase is open to adjustment, according to the situation of the market.

The monthly purchase will amount to 60 billion euros ($70 billion), and the purchase target is securities issued by euro area governments and agencies. The European Central Bank also removed the 10 basis points over the main refinancing operations rate that applied to the targeted longer-term refinancing operations.

As to the effect the program will have on China, Europe is among China’s most important trade partners. The launch of QE will help boost the eurozone’s economy, increase China’s overseas market demand, thus benefiting China’s exports, all relatively positive.

On the other hand, the policy, together with the United States normalizing its monetary policies, will further strengthen the exchange rate of the US dollar. Thus this may pose downward pressure on the exchange rate of the Renminbi against the dollar.

This will also help relocate capital around the world. The large liquidity brought forth by the new round of QE will no doubt cause a spillover effect, and the strengthening of the dollar’s exchange rate will drive capital back to the US. All this will increase the uncertainty of the international capital flow.

The People’s Bank of China understands that the European Central Bank adopts monetary policies that fit the situation of the eurozone’s economic development.

Governor Zhou Xiaochuan said in the Davos forum yesterday that monetary policies are not a cure-all, but they can buy more time and room for the formulation and implementation of other policies.

Christine Lagarde, managing director of the IMF, also said yesterday that accommodative monetary stance should be supported by structural reforms to boost potential growth.

In the meantime, we hope that central banks in various countries, including the ECB, will communicate and collaborate more on international platforms, such as the G20, on the implementation and the potential spillover effects of their monetary policies, thus working together to maintain financial stability.

China Central television:

What are the new financial reform measures to be unveiled in 2015? The second question is about the deposit insurance scheme. In 2014, the draft of the scheme was circulated to all walks of life for suggestions and can you share with us the latest progress? Are there any modifications? When will it be formally launched? Thank you.

Pan Gongsheng:

Yesterday, Premier Li Keqiang made a very important point when addressing the World Economic Forum in Davos, Switzerland. He said that if the Chinese economy eyes steady and sustained progress, it must unswervingly press ahead with reform and innovation. This year will witness the People’s Bank of China rolling out relevant reforms in accordance with the spirit of the Third Plenary Session of the 18th CPC Central Committee and the Central Economic Work Conference. The following are the priority tasks:

First, accelerate market-based interest rate reform. Certificates of deposit intended for enterprises and individuals will be introduced at an appropriate time, the scope of debt products and market-based pricing by financial institutions will be expanded, the benchmark interest rate system will be strengthened, and the market-based interest rate system will be improved. The interest rate regulating system of the central bank will see further efforts to seek perfection, and the central bank’s capability to control interest rate and the effectiveness of macro controls will be strengthened.

Second, improve the mechanism that shapes the market-based interest rate regime. In 2014, we took one major step forward. This year will witness supply and demand playing a bigger role in the market, and the flexibility of the RMB exchange rate regime will be increased.

Third, steadily press ahead with the convertibility of RMB under the capital account. Measures to be taken include: an incremental approach to the convertibility of transactions of personal capital, to start a pilot program intended for qualified domestic personal investors, to establish a foreign debt management system within a macro and prudent framework, and further improve the monitoring network that oversees cross-border capital flows.

Fourth, strive for an early launch of the deposit insurance scheme.

Fifth, implement the reform plan of policy financial institutions. The State Council has approved the reform plan for Agricultural Development Bank, and the CPC Central Committee and the State Council will in the near future approve the reform plans of the China Development Bank and the Export-Import Bank of China. Also, we will further encourage innovation in financial markets; work on the perfecting policies, measures, supervising framework and mechanism on Internet financing; improving the system that monitors, alerts and tackles financial risks.

Pan Gongsheng:

You asked about the deposit insurance scheme. The executive meeting of the State Council has passed the plan for implementing the deposit insurance scheme. In December, in accordance with legislative procedures, we circulated the draft provisions of the scheme to all walks of life for suggestions. Our efforts have come to a successful end, the suggestions were delivered in a proactive manner, the feedback was very positive, and the financial market has been running smoothly. In regard to the framing of China’s deposit insurance scheme, due consideration has been given toward the situation in China; we have learned from the experiences and lessons of some economies reforming their deposit insurance schemes in the post-financial crisis era; and the fundamental factors of the Chinese scheme will reflect the best international practices. As for the core factors of the scheme, the first is that compulsory insurance will be stipulated and all financial institutions which accept deposits must subscribe to the deposit insurance scheme.

The second core factor is the upper limit of compensation. The current upper limit is 500,000 yuan, which protects the majority of the depositors and takes into full consideration the prevention of moral hazards, addressing risks faced by both the institutions accepting deposits and the depositors. The existing limit is comparatively high among major economies that have established such schemes. The international practice usually defines such a limit as 2 to 5 times GDP per capita; and our limit is 12 times GDP per capita in China. Our research has found that such a figure will cover 99.6 percent of the depositors in the country.

The third factor is the low fees. Our rate is relatively low compared to our counterparts. In the initial stage, the fees are unified at a single rate, and soon there will be transition to differential rates. The rates will vary according to the level of risk of the insurance institutions.

The fourth factor is that the deposit insurance fund is financed by the market and intended for the market. All deposit-taking financial institutions pay for the fund, and the fund prioritize safety ahead of investments.

The fifth factor is the early correction and risk management functions, which have been designed to draw recent lessons from abroad.

The sixth factor is that the insurance starts as a fund, which reduces administrative cost, boosts efficiency and ensures the stable running of the scheme.

Such a scheme is a landmark event in China’s economic and financial reform and development and we believe that, after its establishment, it will better protect the interests of depositors, maintain financial market stability and nurture public faith in China’s financial system. Building a strong deposit insurance scheme will also be helpful to further promote the healthy development of China’s banking sector and financial institutions.

It is known to all that, logically speaking, the deposit insurance scheme is an important forerunner in a range of ongoing reforms, such as market-based interest rate reform, the inbound and outbound opening up of the financial sector, the plan to promote private-owned banks and small, medium-sized banks. It is also a very fundamental reform initiative that will create a more favorable climate. The scheme will be put into practice after getting required approvals. The PBOC will work along with the relevant authorities, and make preparations and organize implementation as required by the State Council.

Itar Tass:

Western countries imposed sanctions on Russia in 2014. Did these measures influence China? Can China and Russia continue to cooperate in the financial sector under such circumstances? Thank you.

Pan Gongsheng:

Russia has its reserves and the public debt level in Russia is relatively low. We believe that the Russian government and the Russian central bank has a policy space to deal with the temporary economic difficulties. Based on mutual benefits, the current situation of financial cooperation between China and Russia is good. As China’s central bank, we support financial institutions in the two countries to carry out business in accordance with the law and the rules of market of both China and Russia. We will let the financial institutions make their own decisions, take their own risks and make their own profits or suffer their own losses. Thank you.

Wang Zhaoxing:

Being an important trade partner of China, Russia is highly complementary in its economic structures with China, especially in areas like energy. Russia may suffer from temporary difficulties due to Western sanctions, but I think it won’t affect the development of trade or the financial cooperation between China and Russia. Both countries are in a developing stage, there is huge room for investment and cooperation in areas such as energy. I think financial institutions from China will continue to cooperate with Russia in order to further support trade between the two countries. Thank you.

Zhou Yanli:

Regarding insurance, we cooperate with Russia mainly on insuring border trade, cargo transportation, life insurance and tourism insurance. We will continue to support insurance corporations from both countries and enhance cooperation in trade, personnel and tourism in order to benefit bilateral economic development and personnel exchanges.

China National Radio:

My question goes to Vice chairman Wang. How are the five private banks which were approved last year doing? What are this year’s plans for the trial program setting up private banks?

Wang Zhaoxing:

The China Banking Regulatory Commission carried out a trial program to establish private banks and approved the setting up of five private banks last year, one of which has actually started operations. During his visit to Shenzhen, Premier Li Keqiang clicked on the keyboard and extended the first loan offered by the bank. This was a crucial step for the development of China’s private banks.

We will approve the operation of the other four banks according to how well they are prepared, and will keep formulating and improving regulations on private banks according to the experience of the trial. We will push the development of private banks at a gradual pace according to the needs of the economy and the need to optimize financial structures.

At the same time, we will set up more effective systems to manage risks for private banks in a discreet manner to make sure that the banks develop healthily and offer better services to the public as well as to the real economy.

The reforms mentioned before, including the market-oriented interest rate reform and establishing a deposit insurance system, all help improve the market environment for small and medium-sized banks, including private banks. A fair playground will offer a lot of opportunities as well as challenges for them.

Thank you.

Xinhua News Agency:

I have two questions for Mr. Pan and Mr. Wang respectively. The first question is about recent reported cases — the first one from Hangzhou — that money in some deposit accounts was found missing. Who will be responsible for the cases? The second question is about a circular released in October 2014 that stated the position of the central government about having no bailout plans (for local government debt). We observe that shadow banks and local government debt pose a threat to economic development. Are there any countermeasures by the central bank in this regard? Thank you.

Wang Zhaoxing:

Please allow me to address your second question first. During the previous financial crisis, China unveiled timely countermeasures. Local governments utilized financing platforms for direct or indirect funding to build infrastructure, and their debts have increased indeed. Not long ago, China issued rules for regulating local government debts and budgets. In general, they are aimed at more effective budget controls and management to control the scale of local debt, and were introduced to further standardize the management of local governments’ financing platforms. Such efforts involve issues such as identifying and regulating existing local debts, eliminating risks, and controlling and managing the incremental part of local debts. This is a very important step in China’s entire economic and financial reform process. Excessive debt is a triggering factor for a financial crisis, and we should strengthen local debt management and risk control.

In fact, local governments have financing channels other than bank loans. Therefore, we should tighten credit risk management and control over local financing platforms, and strengthen regulation and oversight over other noncredit financing channels. Also, we should tighten controls on volume of social financing and the overall debt levels. We are confident that local debts will be reined in with the new mechanism, and their risks eliminated through stronger measures, to ensure the safety of bank credit and better support the real economy.

Pan Gongsheng:

I have a few more points. There are several angles to examine local debt in China. First, overall government debt level in China, which consists of debts by the central government and of local governments, is controllable. We have a low rate in comparison to counterparts around the world. Second, Chinese local government debt is backed by corresponding assets. Third, the local debts are mostly for improving infrastructure, and such investments have a strong positive externality.

Also, local debts harbor risks to some extent, such as the heavy burden of debt servicing for some local governments, fiscal revenue being overdependent on land transfer, and stand-alone cases of illegal financing or irregular using of governmental loans. There has been a great deal of discussion in the past few years over the lack of regularity or transparency with local debt. The Chinese government is well aware of the issue. As for the People’s Bank of China, the next step is to work with relevant authorities, review and regulate local debt, and shape a transparent local debt financing scheme.

As for the cases where money in deposits is missing, I believe they are stand-alone instances, and the figure so far is small. The PBOC and China Banking Regulatory Commission will prompt commercial banks to strengthen internal controls and risk management and tighten internal supervision to rule out the possibility of such cases happening once again. We will collaborate with the authorities, including public security agencies, to crack down on financial crimes and fraud to ensure the health of the financial sector.

Wang Zhaoxing:

I noticed the cases reported about the missing money from deposit accounts. Details will emerge after further probes. According to China’s laws and regulations, banks have the obligation to protect the rights and interests of depositors. Investigations, including those by jurisdictions, are necessary for identifying the reasons: was it due to loopholes in management or information systems, or a conspiracy masterminded by criminals and banking staff members working together? There should be a suitable response based on the specific situation. However, banks should not shirk their duty in improving internal management to better protect depositors.

Wall Street and Dow Jones:

I have two questions for Mr. Pan. You just mentioned deposit insurance and fund. How much is the fund now? You said the premium rates are the same but will vary with different risk, so when will the differences will be announced? Is there any thought about implementing the different rates? Currently, banks have some new monetary management tools. I’m not sure about my understanding, and is M2 a tool to replace lowering the reserve requirement ratio?

Pan Gongsheng:

About your first question, I want to add something. China’s deposit insurance scheme has not been implemented yet. It is too early to talk about the size of the deposit insurance fund now. About the premium rates, we have made sufficient comparisons and researched the rates of deposit insurance schemes in major economies. The scheme in China is at an early stage and its premium rate is set to be relatively low. Like I just said, we will adopt a single premium rate, and all the deposit financial institutions will have the same rate. But as everybody knows, all major global economies are now using differential premium rates, setting different rates according to the risk level of the deposit financial institutions. However, this task needs a certain basis. Therefore, the structural design of China’s deposit insurance will start with a single rate and soon be transformed to differential rates.

The second question is about monetary policy tools. Over the past few years, the People’s Bank of China has increasingly diversified monetary policy tools. Is there any new monetary policy tool that will replace the reserve requirement ratio? I can give a certain answer: they are not mutually replaceable. Thank you.

Kyodo News Agency:

My question is for Mr. Pan and Mr. Wang.

Mr. Pan has mentioned that the PBOC should safeguard the bottom line to ensure systemic financial risks do not occur. Could you please explain what kind of risks you are referring to? What will happen if such risks occur? Will they lead to the bankruptcy of large banks?

Wang Zhaoxing:

A financial crisis will be a catastrophe for the whole economy and society. Therefore, it is the highest mission and top goal of supervisory authorities to prevent this occurrence. Even though China didn’t directly suffer from the financial crisis, we can still learn a lot from it.

First, the international community has started reforms on international supervision, by implementing many new international standards. Such standards, which regulate capital, liquidity as well as supervising the capital of major banks both at home and abroad, are devoted to prevent a financial crisis from happening.

As for China’s case, we are also in the process of reform and transformation. At the moment, we are experiencing a slowing economy, restructuring and the absorption of previous stimulating policies.

Enterprises will be faced with new difficulties amid the pressure of an economy facing downward pressure. Some will have an issue of overcapacity. Potential risks also exist in the real estate sector and local debt in some regions. All these could result in new financial risks.

So, we will, on the one hand, continue the reforms in the banking industry in terms of company governance, internal mechanisms, to reduce risks; on the other hand, we will apply regulatory standards in a more efficient and strict manner. I think these efforts are all devoted to preventing the occurrence of systemic and regional financial risks.

This is our highest goal, and also the bottom line of our supervision.

Wang Zhaoxing:

Of course, we have not experienced the scenario you mentioned. But we have carried out stress tests on financial institutions. We have done these tests from top to bottom, from individuals to the system in general to see what will happen to financial stability, the quality and liquidity of bank assets, if the economy has real challenges say with real estate and local debt.

By doing this, we will know how to improve to prevent potential risks, and boost the effectiveness of preventing systemic and regional risks.

We are also increasingly strengthening the banking system’s ability to reduce and combat risk. We have increased the requirements for bank capital over the past few years. The capital adequacy level of the Chinese banking sector has been close to 13 percent, much higher than that being set internationally.

At the same time, we have asked banks to prepare provisions against risk according to current risk and future development. That is to say, the banks should use the provisions they have withdrawn from profits to address possible future risk.

The existing provisions are nearly three times of the current amount of bad loans. We have greatly improved the risk-prevention ability of the banking system in terms of both capital and risk provisions.

We are highly concerned at the supervision on some key areas that could possibly cause systemic and regional risks. The efforts include efficient regulation of financial institutions that are systemically important, higher standards for capital and liquidity, stronger control of shadow banking and local debt.

We endeavor to address risk that has already occurred and prevent new risk.

So I think China’s financial risk is still at a controllable level. We are confident that we can hold the bottom line.

Thank you.

Pan Gongsheng:

Mr. Wang has given a rather comprehensive answer to this question, which is a good one. What is systemic and regional financial risk? There is seemingly no quantitative index. Is it the systemic and financial risk occurring if say an index reaches a certain number? Until now, there is still no quantitative index. People hold various discussions and opinions that we should take multiple factors into consideration to judge whether it’s a systemic and regional financial risk or not. Regarding the 2008 subprime mortgage crisis in the US, undoubtedly it was a systemic financial risk. During the last decade of the 20th century, undoubtedly, the financial crisis in Japan was also a systemic financial risk. By the end of the last century, and the beginning of this, a huge potential systemic risk existed in the Chinese banking sector and there was no quantitative index to judge this so it was necessary for the PBOC to establish an index and standard system for monitoring risks. Just as Mr. Wang has said, the PBOC and CBRC are doing some stress tests, which do not target a single certain financial institution, but the entire financial system, placing emphasis on systemic financial risk.

Besides, the current Chinese financial system remains stable and healthy and the risks are under control. I think there will always be risks in any financial sector during any time and in any country. For financial monitoring departments, there should be a mechanism, ready to alert us. Since I entered the banking sector after graduation from college in 1993, we have been talking about financial risk. Vice chairman Wang told us the overall risk in the current Chinese banking sector is under control and by the end of the third quarter, 2014, the rate of nonperforming loans was 1.16 percent and capital Adequacy Ratio was 12.9 percent. Moreover, the level of capital adequacy and quality remain high, because the structure of core tier one capital, the essence of capital, is relatively good.

Besides, the bank provision coverage is rather wide and there is enough provision, approximately 250 percent, according to Vice chairman Wang. Comparing it to the global banking industry, it’s a high provision.

China Daily:

Recently some media reports suggested that insurance institutions in China are involved in real estate investment overseas as well as investing in the stock market. Can you inform us about the scale of this investment and how should the supervisory body prevent related risks?

Zhou Yanli:

Recently, we have played much attention to overseas real estate investment by insurance funds stimulated by the recovery of the real estate market in Europe and the United States. This investment started late because Chinese insurance institutions seldom engaged before in overseas real estate investment. So it’s natural for people to notice our current engagement in this. For example, some well-publicized purchases included the Lloyds Building in London, property in London’s Canary Wharf business district, New York’s Waldorf-Astoria Hotel and Sheraton Hotels in Australia.

I can give you detailed data. The total investment of insurance funds overseas is $23.96 billion,, accounting for 1.44 percent of current total insurance assets. It’s a very low proportion. In terms of investment regions, Hong Kong is the major market with stocks and bonds being the major investment forms. Assets in the Hong Kong dollar are high, more than 64 percent. In terms of investment variety, equity assets, such as stocks and equity products, come top. Real estate takes up about 20 percent of total investment with fixed income products like bank deposits and bonds accounting for the rest.

Zhou Yanli:

From the perspective of risk control and prevention, I think the CIRC will continue to closely monitor the operation of domestic and international economic and financial markets and analyze on a regular basis the risk situation for insurance institutions’ investments. The CIRC will also supervise the insurance institutions to strengthen their risk identification, monitoring and evaluation, to improve their risk prevention and control, as well as to operate in accordance with laws and regulations in a stable and prudent manner.

In addition, based on the detailed situation of the investment, we will issue risk alerts promptly, so that insurance institutions can perform following CIRC guidelines.

Also, as some of you earlier asked about stock investments, the CIRC will promote the development of market-oriented reform in insurance funds investment, the integration and simplification of investment regulations, and the enhancement of companies’ autonomy and their ability for independent risk judgment. The insurance institutions could also make their own investment decisions based on their liabilities, management needs, and investment philosophies. They are allowed to develop stock investment businesses within the limits of regulatory policies. We do have specific requirements for insurance institutions, and to strengthen the management and control of risk is our main objective.

China News Service:

My question is for Mr. Pan. In recent years, Internet financing has been booming in China, but there have also been cases reported about P2P finance service providers fleeing. How does the central bank view the domestic Internet financing sector, and is there any plan for regulatory efforts in future? Is there a timeline for the plan?

Pan Gongsheng:

Indeed, Internet financing has been developing rapidly in the past few years within China, making it a hot topic among people, academic circles and media organizations.

The healthy development of Internet financing will be helpful in increasing the spread of China’s financial system as well as its level of inclusiveness, boosting the efficiency of financial transactions, lowering transaction costs, and leading private financing to develop in a more regulated pattern. Meanwhile, the Internet financing business has a lot in common with traditional financing sectors, including some features that differ greatly from other industries. The risks in the financing sector are usually deep-seated and unseen, the crises spread quickly, and the huge spillover effect may impact other businesses in the market as well. Therefore, strengthening supervision is a basic requirement for its healthy development. As for the policies to shape and regulate its development, the PBOC has taken a consistent position, which is to encourage innovative development and exercise necessary oversight. Along with the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission, the PBOC has drafted a guideline for promoting the healthy development of Internet financing. The regulatory principle of ensuring appropriateness, categorization, collaboration and innovation should be followed. A stronger regulatory framework is expected to be built for outlining the extent of business operations and the conditions for entering the market. The missions and duties of different financial regulatory bodies should be clearly followed. Bottom lines should be drawn to protect lawful operations and crack down upon illegal or irregular businesses.

In the next move, the PBOC and finance regularity authorities will soon improve the policy structure that supervises Internet financing, strengthen policy coordination for regulatory efforts, and ensure and promote the healthy and virtuous development of the sector.

Wang Zhaoxing:

I have a brief comment to add. In the past five years, the Chinese finance sector and the banking sector surprised the world with two landmark achievements. The first is that several Chinese banks have joined the ranks of global top 10 banks, which were mostly from the West and Japan in 1980s and 90s. This mirrors the rapid growth of the Chinese banking sector along with the reform and opening up. The sector plays a vital role in the global financial arena, and will definitely make a major difference to rule-setting in global finance.

The other surprise is the rapid growth of China’s Internet financing. I believe that the sector’s development reflects the huge demand existing at the moment for financing services, which are not entirely met by traditional banking businesses. During the process of easing curbs and advancing marketization, Internet financing provides services with greater convenience and efficiency, and the public has enjoyed the experience. This has prompted traditional banking services to accelerate innovation, and improve service to better meet public demand. That is why the Internet financing plays a very positive role.

However, the nature of Internet financing as a financial avenue should not be ignored. As for financing activities, the Internet is a carrier, an avenue, an approach and a platform. Traditional financing businesses are improving their services and better addressing public needs with the aid of modern technologies. Where there is a financial transaction, there is a corresponding financial risk. Therefore, the regulatory bodies are expected to prompt the sector to develop on a healthy basis, boost the reform and innovation of the entire banking industry and improve services. Also, great attention should be paid to the potential financial risks brought by Internet financing, and regulatory efforts should be tightened for capital, liquidity and information disclosure. Currently, the PBOC and the China Banking Regulatory Commission are engaged in formulating regulations to improve supervision and achieve a healthier development of Internet financing.

Zhou Yanli:

The booming and expanding realm of Internet, big data, cloud computing and mobile devices signifies huge benefits and an unprecedented opportunity to expand sales channels for the insurance sector. On November 11 last year, 150 million online orders for insurance contracts were processed within a single day. This is unimaginable on traditional offline platforms. The Internet has provided a great chance and vitality for the insurance industry. The China Insurance Regulatory Commission has taken a positive attitude in this regard, and one of our regulatory philosophies is to encourage innovation, ensure appropriateness of supervision and effectively protect rights and interests of consumers. People are keen to know how the regulations will be rolled out. The major goal of the regulatory measures is to tangibly ensure consumers’ rights and interests.

First, improve the operations of market participants, such as information disclosure, in order to best protect consumers’ rights to know and to choose. Second, strengthen supervision of information security to ensure data and information security of Internet insurance transactions. Third, conditionally lower geographic restrictions upon the domains of insurance business operations, and take steps to allow trans-domain sales for products sold online and to allow insurance providers to run trans-province businesses. Fourth, provide Internet technology assistance services, including third-party platforms, to strengthen curbs on Internet insurance businesses and ensure that service providers in the insurance business are suitably qualified. Recently, the CIRC issued a circular to collect suggestions from the community, improve regulatory efforts and better serve the various needs of economic and social development as well as consumers.

Guo Weimin:

All the three senior officials have answered the questions, a fact that shows various departments pay a lot of attention to Internet financing.

That is the end of today’s briefing. Thank you so much!