The power of a newly established Chinese public organization, namely the Financial Stability and Development Committee, is growing. Said organization was created precisely on November 8, 2017.
It is an important organization under the State Council’s direct control. Indeed, it is an office of the Council itself which will deal mainly with China’s financial stability and with all matters concerning economic development and monetary and capital stability.
More specifically, the Committee will be tasked with deliberating major national programs for regulating the financial system, for organizing monetary policy with the Central Bank and for defining tax policies and the related fiscal and industrial actions.
This Committee will also be responsible for analysing international and domestic financial situations, identifying the greatest global financial systemic risks, as well as studying the related conditions and finally defining the ways for reaching financial stability.
The important choice made in relation to this Committee is that it will be chaired by the Chinese Vice Premier, Ma Kai.
The idea of creating this organization had been suggested directly by President Xi Jinping during the National Financial Work Conference held on July 14-15, 2017.
The Committee will also strengthen the macro-systemic policies of China’s Central Bank. In fact, it is a matter of regulating and stabilizing the Chinese financial market, which is worth 40 trillion US dollars and is one of the largest in the world.
The Chairman of the Committee and Vice Premier, Ma Kai, was born in Jinshan, a district of Shanghai, in 1946.
In the mid-1990s he was elected Vice-President of the National Planning Commission.
He was Deputy-Head of the State Council from 1998 to 2003 and also Minister for National Development from 2003 to 2008. He was appointed President of the National School of Administration and later Head of the Office for the development of small and medium-sized enterprises.
In fact, the Committee will also be tasked with coordinating tax and financial policies and tuning them with the long time schedules of the industrial system, while the collaboration between the Committee and the People’s Bank of China will allow the regulation of the 15 trillions currently invested in financial products throughout China.
With the creation of this Committee, high-risk investment or massive bank loans to buy securities will no longer be allowed, while it will be mandatory to set 10% of managers’ profits aside.
China is currently turning its old role as “world factory” into that of a modern consumer-driven economy.
Hence the need to regulate corporate and retail finance.
There are three issues underlying the new Chinese financial regulation: a) booming loans, the majority of which are requested by businesses and local governments; b) complexity, considering that risky creditors have moved away from banks, due to the complexity of rules, towards less structured products, while Chinese banks currently offer mainly financial products for the long-term management of household and business savings.
The third issue is c) guarantees. With a view to preserving their reputation, Chinese banks often offer even compensation to their clients who have lost money as a result of certain investment, which leads them to miscalculate their risk share.
Hence an extremely fragmented banking system which is hard to control.
The Chinese systemic risk must be kept well under control: financial assets have grown fourfold over the last decade, from 310% up to 510% of the GDP, which, however, has grown by 2.5 times over the same period.
The expansion of credit has been led by the public sector and by its very poor regulation, with the expansion of shadow banks, non-orthodox credit and particularly risky – but attractive – financial products for private investors.
Credit growth has already declined, while corporate access to capital has also decreased considerably.
For the Party, however, the fragility of the financial system arises from the excess of leverage and debt investment and from the excessive debt in many sectors of the real economy, while credit has expanded too rapidly in the financial sector.
In late 2016 the average national leverage amounted to 247%, while companies’ leverage was 165% in the same period.
Definitely too much debt for companies and individuals, far beyond the international standard.
As President Xi Jinping has pointed out, the control of aggregate money supply has been severely lacking.
President Xi Jinping has also noted that the financial institutions’ general control has been missing and the State has focused only on the individual links of the chain of financial audits.
President Xi Jinping has also maintained that the State has been unable to control major financial companies.
Moreover, the Chinese government’s interest in financial matters has never been negligible.
The National Financial Work Conference had been created as early as 1997.
Later, based on the analysis of that select group, the first Chinese sovereign fund, namely China Investment Corporation, was created in 2007.
A structure that can currently boast to have capital to the tune of 813.5 billion US dollars.
The fifth National Financial Work Conference was held in July 2017, simultaneously with the creation of the Committee.
As the CPC noted, all this was designed to reach “national financial security”, mainly with a view to backing the aims of the 13th Five-Year Plan.
President Xi Jinping also thinks that the new Committee shall a) deal with the real economy and b) combine and harmonize social development with economic development.
According to President Xi Jinping, finance is never disconnected from the social context in which it operates; c) financial regulation is always aimed at eliminating the systemic risk and d) reaching national financial stability.
Stability first and then development – this is President Xi Jinping’s belief.
Furthermore, local governments shall follow the central government’s rules. Any failure to report the financial risk will be regarded as an administrative irregularity.
This will be very useful, considering the ongoing trade war between the United States and China.
In fact, China has resorted to the WTO dispute settlement mechanism against the duties levied by President Trump.
It is worth recalling that the United States has levied duties equal to 25% on imported Chinese goods, for a total value of 50 billion US dollars.
So far these duties have been levied only in the aluminium and steel sectors.
China has responded immediately by levying equal duties on US products such as soy, pork and vegetables.
The immediate US countermove has been the doubling of duties on aluminium and steel up to 100 billion dollars.
One of the reasons for the current clash is certainly the forthcoming mid-term elections for which President Trump wants to keep on winning the support of the Rust Belt protectionist voters who enabled him to rise to the White House.
Moreover, according to the universal supply chain system, many of the Chinese products taxed by the United States come from South Korea, Taiwan and even from the European Union.
Hence the Chinese pressure could harm US farmers and the whole US middle class, as well as some of US best allies.
Therefore, while China’s recourse to the WTO has not slowed down the aggressive posture of the Chinese economy towards the United States and the European Union, the aim of the current duties is to force China to revalue its currency, so as to rebalance the deficit between China and the United States, with the latter already recording a trade deficit with China to the tune of over 375 billion dollars.
Reading between the lines, President Trump wants a decrease of Chinese duties on US cars, so that there is an increase in China’s purchase of US semiconductors and, in any case, a greater share of the huge Chinese market for US companies.
Furthermore, China undermines intellectual property in the advanced sectors of computer science and Artificial Intelligence.
Finally, for the United States, the issue lies in hitting Chinese innovation and the “Made in China 2025” project, which is supposed to ensure China’s global strategic superiority in cutting-edge products, robotics and advanced infrastructure.
If everything goes well, at the end of this trade war, China will impose on the United States a network of joint ventures and selective openings for US products on the Chinese market.
That is what the new Chinese financial authority is for: to raise capital for the State’s primary projects and to protect China’s finance from the turmoil that could be caused by the monetary and economic imbalances resulting from the entry of foreign liquidity into the Chinese market.
GIANCARLO ELIA VALORI
Honorable de l’Académie des Sciences de l’Institut de France