Hu Kaihong (host):

Ladies and gentlemen, good morning. Welcome to the weekly policy briefing of the State Council. The State Council executive meeting on Dec 2 discussed regional financial reform and innovation, which has attracted much attention. We are glad today to have with us Lu Lei, head of the Research Bureau at the People’s Bank of China (PBOC), Xing Yujing, head of a monetary policy department at PBOC, and Ji Zhihong, head of the Financial Market Department at PBOC. Please let them introduce the new updates on regional financial reform and answer your questions.

Lu Lei:

Thanks. Good morning, ladies and gentlemen, and friends from the media. I’m very glad to attend today’s policy briefing. First of all, I’d like to express sincere gratitude on behalf of PBOC for your long-time concern and attention to financial work.

Lu Lei:

As you know, Premier Li Keqiang presided over the 114th State Council executive meeting on Dec 2, mapping out the work on regional financial reform and innovation. Now I will make a brief introduction on that in three parts.

Lu Lei:

First, what is the general framework of regional financial reform and innovation? On the one hand, in light of instructions from the central government, PBOC has been cooperating with authorities to select regions with good conditions to carry out some tests of financial reforms. The scope of regional financial reform and innovation ranges from developed eastern and coastal regions, central regions undergoing industrial transformation, under-developed western regions, to border regions and those inhabited by ethnic groups. The reforms include financial opening up, renminbi’s capital account convertibility, rural financial reform, non-governmental financing and cross-border financial cooperation.

Lu Lei:

Generally speaking, regional financial reform and innovation is aimed at improving financial support for the real economy. Regions with mature conditions will be encouraged to connect financial reform with industrial structure upgrading, and financial innovation with demands of economic and social development. Local areas will be encouraged to utilize existing policies to improve efficiency of financial operation and push forward practical financial reform and innovation with local characteristics. So far, positive results have been achieved.

Lu Lei:

In order to improve financial support for the real economy, upon serious study with related authorities, PBOC has selected several regions to push forward regional financial reform and innovation. In order to improve financial support for agriculture, rural areas, and farmers, as well as small and micro businesses, a blueprint for tests of comprehensive financial reform in rural areas of Jilin province and an overall scheme on a pilot zone focusing on financial reform for small and micro businesses in Taizhou, Zhejiang province, have been completed. Guidelines for tests in pilot zones of Guangdong, Tianjin, and Fujian have also been drafted per instructions from the State Council.

Lu Lei:

The testing program of financial reform in rural areas of Jilin province focuses on reinvigorating rural property rights, the supply chain of agricultural industrialization and Internet financial innovation, as well as reducing modern agricultural scale operation risk.

There are six reform tasks:

First, improve the organization system, carry out pilot projects in new cooperative financing, and establish the guarantee system for agriculture, rural areas and farmers.

Second, create new financial service modes of supply chain.

Third, expand the scope of guaranty and carry out pilot projects in land management rights and housing property mortgage loans.

Fourth, develop Internet services and strengthen policy support for e-commerce in rural areas.

Fifth, explore projects in agriculture-related asset securitization, such as land benefit guarantee loans, and help agriculture-related enterprises raise funds in the capital market.

Sixth, strengthen support for agricultural insurance and carry out pilot reforms of specific agricultural insurance.

Lu Lei:

Effective ways to solve the problems of small and micro businesses’ difficulty in raising funds are provided in the overall plan for financial reform and innovation zone in Taizhou, Zhejiang province.

Eight reform tasks are put forward in the plan:

First, support the upgrade of small and micro businesses and improve the efficiency of entrepreneurship and innovation.

Second, improve the multi-level financial organization system.

Third, use modern technologies to innovate financial products and service modes.

Fourth, expand direct financing channels for small and micro businesses.

Fifth, improve the guarantee and insurance system for small and micro businesses to raise funds.

Sixth, promote the building of social credit system in local areas.

Seventh, enhance cross-Straits financial exchanges and cooperation for small and micro businesses.

Eighth, improve the financial regulation and risk prevention system and set norms for private financing.

Providing financial support to build pilot free trade zones in Guangdong, Tianjin and Fujian will be helped by the successful experience in building the FTZ in Shanghai. Meanwhile, we put forward three tasks:

First, further expand cross-border use of RMB.

Second, expand reform of the foreign exchange management and allow institutions in these FTZs to take on foreign debt.

Third, improve the financial service level and make efforts to set up an account management system fit for the FTZs.

Fourth, strengthen supervision and management, and improve regional financial supervision and coordination.

Lu Lei:

The three guidelines also put emphasis on their own financial characteristics. Guangdong attaches great importance to promoting financial market connection with Hong Kong and Macao. Tianjin explores comprehensive financial services combined with the coordinated development of Beijing-Tianjin-Hebei. Financial trade cooperation mechanism will be improved in Fujian with a focus on cross-Straits financial cooperation.

Lu Lei:

The People’s Bank of China will promote all reforms with related departments and local governments. The central bank will hold fast to the bottom line that no systemic or regional financial risk should occur, and provide valuable experience for further financial reform. The central bank, along with other departments, is also working on some other pilot programs concerning regional financial reforms. These programs are involved in the sectors of technology finance, green finance and inclusive finance. I believe we will brief the media in the near future.

Hu Kaihong:

Now, questions. Please inform your news agencies.

TASS Russian News Agency:

Mr Lu, you just mentioned financial reform in Northeast China’s Jilin province, was anything involved in the financial reform related to Russia?

Lu Lei:

Jilin is an agricultural province with a huge grain output. Statistics show that the primary industry takes up 11.4 percent of Jilin’s total gross domestic product in 2014. The province’s grain output was 70.6 billion jin (35.3 billion kilograms) last year, 5.8 percent of the country’s total, and fourth among provinces in China. And if we calculate the yield per unit, it has the highest yield, with 942 jin per mu (one mu = 1/15 hectare). When we made the test plans for such a large agricultural province, our consideration was how the finances will serve the province’s moderate scale management of land and quality improvement of its agricultural products.

I think you just asked a good question. Jilin is one of three provinces in Northeast China, and it borders Russia. Financial reform and innovation in Jilin will be carried out under the framework of test runs of cross-border use of renminbi, capital account convertibility to promote and expand the province’s communication and cooperation with neighboring countries, including but not limited to Russia. Thank you!

People’s Daily:

Why did the State Council issue a package of financial reform plans in five regions, and what are the features of the plans?

Lu Lei:

There are four points concerning the regional financial reform plans.

First, both central and local governments should play active roles in development featuring innovation, coordination, green development, opening-up and sharing, under the context of the 13th Five-Year Plan. Thus, regional financial reform will be a key part in supporting reform and development.

Second, financial support should be given to weaker areas in economic development, such as issues concerning agriculture, rural areas, and farmers as well as small and micro businesses. So, under that context, tests of financial reform in rural areas will be set out in Jilin province, and plans to provide financial services for small and micro businesses will be carried out in Taizhou, Zhejiang province.

Third, the financial reforms will be carried out in regions where conditions are ripe. We found that conditions for financial reform and innovation in rural areas of Jilin province are relatively mature, and experiences concerning platforms, products and system of financial services for small and micro businesses have been gathered in Taizhou, Zhejiang province. So we have to figure out whether the reform and innovation in Jilin and Taizhou could be replicable and applicable to areas concerning agriculture, rural areas, farmers, and enterprise development.

Fourth, since Shanghai has carried out financial support plans, three more free trade zones should consider similarities and differences to put forward plans for financial reforms and innovation as soon as possible.

We welcome suggestions for further improvement of the plans.

China National Radio:

The renminbi being included in the International Monetary Fund’s Special Drawing Rights (SDR) has ignited discussion over the internationalization of the currency. What are the latest updates?

Xing Yujing:

The internationalization of the renminbi is an issue that draws a great deal of attention, especially after the currency entered the SDR. The internationalization has been going on steadily, especially over the past 10 months. I would like to introduce to you the progress of the internationalization of the renminbi through five perspectives.

First, the use of the renminbi in cross-border trade and investment. Statistics from January to October 2015 show that cross-border renminbi payments amounted to nearly 9.6 trillion yuan, an increase of 20 percent from the same period last year and also accounted for 28.1 percent of China’s cross-border receipts and payments in both renminbi and foreign currencies. Take a look at the figures of 2014 and you can see how fast it is growing. In 2014, cross-border renminbi payments accounted for 23.6 percent of China’s cross-border receipts and payments in both renminbi and foreign currencies. The renminbi has become the second-most used currency for China’s cross-border payments for five consecutive years. More than 170,000 companies paid for cross-border trade and investment in renminbi, and 124 Chinese banks and 61 foreign banks took part in cross-border renminbi transactions. As many as 192 countries traded with and invested in China by the end of October 2015.

Second, the cross-border use of renminbi began with trade. But its cross-border use has expanded to the financial sector as the financial reforms deepen and companies want more convenient transactions. Since 2011, the proportion of renminbi used in overseas direct investment and foreign direct investment has been rising.

The government also adopted some measures to open up the country’s financial markets. Since 2010, three kinds of institutions can enter China’s inter-bank bond market. From this year, central banks of other countries are able to invest in China’s inter-bank forex market without quota restrictions. Domestic banks and companies began to issue renminbi bonds abroad. In the meantime, foreign institutions began to issue renminbi bonds in China’s inter-bank bond market. Recently British Columbia, in Canada, issued renminbi bonds in China’s inter-bank bond market. Another example is the launch of the Shanghai-Hongkong Stock Connect program last year.

More and more cross-border financial transaction are settled in renminbi.

According to the statistics of the People’s Bank of China, by the end of October 2015, China approved more than 1.7 trillion yuan invested in its inter-bank bond market by foreign institutions. Foreign entities are holding financial assets in renminbi worth 3.9 trillion yuan.

Xing Yujing:

Third, offshore renminbi markets have been developing steadily and rapidly. The renminbi has been used more and more freely in offshore markets. The People’s Bank of China set up renminbi-clearing arrangements in more than 20 countries and regions. These arrangements make trade between China and the 20 countries and regions more convenient and are important infrastructure for the development of the offshore renminbi market. Besides, there have been more and more renminbi products in the offshore market. We started with offshore renminbi deposits in Hong Kong, now we have a number of products in many offshore markets, including deposits, loans, foreign exchange and bonds.

Xing Yujing:

Fourth, the People’s Bank of China has deepened cooperation with other central banks during the internationalization of the renminbi. It has signed currency swap deals worth 3.3 trillion yuan with central banks in 33 countries and regions. It also has signed currency swap deals for border trade with China’s five neighboring countries including Vietnam and Mongolia. Currency swap deals for general trade with Belarus, Russia, Kazakhstan and Nepal have been signed. Also, more than 14 countries and regions have Renminbi Qualified Foreign Institutional Investors with a total quota of more than 1.1 trillion yuan.

Xing Yujing:

Fifth, the renminbi has become an important currency in global forex trade. Apart from the US dollar, the renminbi can be directly traded with eight currencies, including the Australian dollar, sterling, the euro and the Singapore dollar.

China Daily:

The State Council executive meeting on Dec 2 decided to set up a pilot zone focusing on tackling financing problems for small and micro businesses in Taizhou, Zhejiang province. I want to ask Mr Lu, how will the government tackle these problems? Meanwhile, trials of comprehensive financial reform in rural areas of Jilin province will be carried out to promote rural financing development. Can you give us more information on this?

Lu Lei:

Let me elaborate on these questions respectively. First, the government will mainly support small and micro businesses going for direct financing in domestic and foreign capital markets. Of course, this should be done under strict supervision. Meanwhile, we support qualified small and micro businesses to issue short-term financing bills and corporate bonds to raise money. The main direction of this reform is to strengthen infrastructure construction and to establish a credit system for small and micro businesses. The Taizhou government and financial departments have already started related efforts and are striving to solve the problem of asymmetric information.

Ji Zhihong:

Regarding financial reform in rural areas, the management rights of rural contracted land and the property rights of rural residents’ housing are major assets that can be used in the financial sectors. Nowadays, as the reform involves the adjustments of laws, we need to get permission from the People’s Congress, which we are doing right now. The pilot program will be launched next year after the adjustments, and it is very important for promoting the modernization of agriculture and improving agricultural production.

Ji Zhihong:

Jilin province is a traditional agricultural province, which has started such explorations. It has the experience of launching such pilot programs. In 2008, the province became an innovation pilot area for rural financial products and services of the People’s Bank of China. This time, it is a special reform focusing on rural finance and we will gradually advance it in accordance with the overall plan. Thank you.

Lu Lei:

I want to add three points. First, key words that must be mentioned are land revenue guarantee loans, especially in rural areas. The financial sector should support including rural land revenue into guarantee loans. At the same time, we should further improve the equity diversification reform for agricultural development companies and establish a risk compensation mechanism for land income guarantees, to encourage financial institutions to participate in such businesses.

Lu Lei:

Second, not only farmland but also forests, grassland and water features should be included in land revenue guarantee loans, especially in large agricultural provinces. We should establish a related registration mechanism and value evaluation systems for such land. These are very detailed matters.

Third, policies from the central bank should facilitate such reforms, for example, by providing preferential policies regarding loan interest rates. In short, we should encourage financial institutions to enter these areas and cooperate with local governments to create a good platform and a reliable credit system to achieve this work.

Bloomberg:

You mentioned the RMB’s inclusion in the SDR basket. How will it influence the RMB exchange rate?

Xing Yujing:

Deputy Governor of the People’s Bank of China Yi Gang reiterated policies concerning China’s exchange rate at a press conference on Dec 1, where he also talked about the RMB’s inclusion in the SDR basket and internationalization of the Chinese currency.

The RMB’s inclusion shows IMF’s recognition that the currency met the technical criteria for inclusion in the SDR basket, as well as its acknowledgement of China’s financial reform and opening-up.

It also marks a new starting line for China’s path to further reform and opening-up in the future.

As for policies on the exchange rate, China will continue to stick to a managed floating exchange rate regime based on market supply and demand with reference to a basket of foreign currencies.

With the opening-up of China’s financial market, the RMB will play a bigger role in international trade and investment, which will serve to further explore its value in the foreign exchange market.

NHK (Japan Broadcasting Corp):

In Japan, developed financial institutions have financial products and service modes for small and micro-sized companies. Now financial institutions in China are also expanding financial modes for small and micro-sized enterprises. Please introduce the problems Chinese financial institutions encounter?

Lu Lei:

The successful experience of developed countries in the field you just mentioned is surely worth learning from. Yet we cannot deny that financial services for small and micro-sized companies and rural areas is a difficult problem for the whole world. That’s why even international financial institutions are talking about inclusive finance. No matter what size the company is, there are mismatches in financing and access to the market. China is not the only country to face this problem. The Chinese government, financial management department and commercial institutions all have recognized the problem. Surely we need to fix this problem.

Lu Lei:

Second, expanding financing channels for small and micro-sized companies can efficiently solve the financing problems for them. The government has long put forward the requirements. That’s why we are now working on indirect financing, direct financing and innovative financing. At the Fifth Plenary Session of the 18th Communist Party of China Central Committee, Internet finance was also mentioned - that will enable many online retailers and consumers to get low-cost and fast financing. We have also innovated in the traditional finance sector in the past few years. For example, community financial institutions should give more support to small and micro-sized companies. According to my inaccurate statistics, judging from the loans given out by traditional saving financial institutions, our policy guiding and stimulation have been effective.

Lu Lei:

I think you have noticed that with each cut of the requirement reserve ratio (RRR) and interest rates, there were target RRR cuts. As to the macro-economic control, we emphasize adjustment within a reasonable range and target adjustment, in an attempt to shift the financial resources to meet the needs of small and micro enterprises. The financial market department of the People’s Bank of China where Mr Ji works has done a lot of work in direct financing. Both in Jilin and Taizhou, we encourage small and micro enterprises and those economic players in rural areas to gain financing through bond markets or direct financing. We have made a calculation, hoping that by the end of the 13th Five Year Plan or by 2020, direct financing will rise to 25% of the total financing from the current 20%. I believe that small and micro businesses and large and medium-sized enterprises will have advantages in direct financing.

Third, innovation and entrepreneurship in the real economy is indispensable for healthy financing. So having relatively mature deposit financial institutions and capital market including a bond market is not enough. We are glad to see innovations in related fields of financing tools. And that’s why we invest so much effort in regional financial reform because it is micro, concrete and technical. And with one after another concrete technical problems being fixed, it is very likely that the financial difficulties and expensive financing for small and micro enterprises will see some improvement to some degree. That’s why we need innovative financing tools. We need to develop scientific and technological financing and encourage promising and high-quality small and micro enterprises to obtain finance with low costs. So generally speaking, while lowering the leverage ratio, we encourage small and micro enterprises to enrich their financing tools. And we have reasons to believe that in the near future, we will be able to see a sound and improved financing environment for small and micro enterprises.

Phoenix Satellite Television:

The executive meeting said that capital account convertibility will be promoted in an orderly way, so is there any detailed plan concerning trials in the next phase?

Xing Yujing:

The 13th Five-Year Plan has made clear the orderly promotion of capital account convertibility, which is the main direction of our reforms. In fact, with the increasing internationalization of the renminbi in recent years, its convertibility level has been much higher than expected, according to the evaluation of People’s Bank of China and Administration of Exchange Control, and International Monetary Fund’s standards. At the same time, major financial risks didn’t happen. Therefore, we will continue to boost capital account convertibility of the renminbi, as long as the risks are controllable, in an effort to facilitate trade and investment.

However, compared to international level, China’s personal capital account convertibility is relatively low, but we have carried out innovative pilots in some free trade zones. Also, the financial market will further open up. Capital account opening in the past was one-way, such as the QFII (Qualified Foreign Institutional Investors) and RQFII (RMB Qualified Foreign Institutional Investors), but last year we launched the RQDII (RMB Qualified Domestic Institutional Investors) on the basis of QDII (Qualified Domestic Institutional Investors). Meanwhile, more overseas institutions are issuing RMB bonds in China’s inter-bank bond market.

All in all, China’s capital account convertibility is much better than expected, but still lags behind those major currencies of the international market, which is exactly where our financial reforms are aimed at. Thank you.

Hu Kaihong:

That’s all for today’s policy briefing. Thank you all.