Xi Backs stronger risk-reduction role for Central Bank

People’s Bank of China headquarters in Beijing

Chinese President Xi Jinping said the central bank will play a stronger role in defending against risks, calling for more work on safeguarding the financial system and modernizing its regulatory framework.

China will set up a Financial Stability Development Committee under the State Council, Xi said at a twice-a-decade National Financial Work Conference held July 14-15, state media reported without defining the relationship with the People’s Bank of China. Financial security is part of national security, and finance should better serve the real economy, Xi said.

In a speech, Xi said prudent monetary policy, a goal announced in December, should be firmly implemented and the PBOC should take a stronger macro-prudential policy role. He also called for greater yuan exchange-rate reform, an improved foreign-exchange market system, and steady progress in yuan internationalization, according to state media reports.

Xi is ramping up efforts to ensure stability ahead of a twice-a-decade leadership transition this fall at the 19th Communist Party Congress. He has elevated curbing risk in the USD40 trillion financial industry to a new level with “strategic importance” amid increasingly intertwined business between China’s banks, brokerages, asset managers and insurers.

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Establishing the committee is noteworthy, though the meeting didn’t produce much surprise, according to Ming Ming, a former PBOC monetary policy official who’s now head of fixed-income research at Citic Securities Co. in Beijing. The name signifies that the panel should be a ministry-level entity directly under the State Council that’s mandated to oversee overall financial coordination, he wrote in a report yesterday.

China will proactively prevent and resolve systemic financial risks, and step up efforts to reduce leverage in the economy, the official Xinhua News Agency reported, citing Xi. He also called for greater accountability for regulators, saying it’s a “dereliction of duty” if they fail to spot and dispose of risks in a timely manner, and stressed that coordination of financial regulation should be improved, and weak links in supervision strengthened.

“The heavy emphasis on risk prevention will put a damper on much-needed reform in the financial market,” such as developing derivatives markets, said Victor Shih, a professor at the University of California in San Diego who studies China’s politics and finance. “With the wording on holding regulators for any signs of instability, they will definitely err on the side of caution. But if regulations are too stifling, financial talent may leave the country.”

Premier Li Keqiang also spoke at the meeting, calling for moderate credit growth and keeping liquidity “basically stable,” according to state television. He backed “professional, consolidated, penetrating” regulation of all financial businesses to reduce risks. Bloomberg

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