A modern financial system set to fortify China’s global competitiveness
Published: Jan 28, 2024 07:51 PM
Illustration: Liu Xiangya/Global Times

Illustration: Liu Xiangya/Global Times

Financial policy in China recently made waves as the People's Bank of China (PBC), the central bank, decided to cut the reserve requirement ratio (RRR) of all financial organizations by 50 basis points. This decision, effective on February 5, aims to release approximately one trillion yuan of long-term liquidity to bolster monetary market and economic growth. 

On the heels of the announcement, China's stock markets, including the bourses in Shanghai, Shenzhen, Beijing and Hong Kong, all staged stellar rallies during the last three trading sessions. This significantly boosted market morale and public confidence in the country's bright future.

China's top leadership recently convened an important financial work conference in Beijing, attended by nearly all ministerial-level officials, to chart a course on comprehensively strengthening the country's financial sector. By all metrics, building a financial powerhouse in China is imperative and in synergy with the country's current position as the world's largest manufacturing base, important technology innovator, and unparalleled trade power. 

China's economic development in the coming years requires strong support from the financial sector, both in terms of monetary policies and financial services. That explains why the financial work conference called for intensified efforts to phase in an effective and full-fledged financial management structure, oversight regime and financial service system, in addition to building a strong and well-managed capital market. 

The financial policy loosening, in the form of the 50-bps RRR cut by the central bank, was widely expected by market investors in the wake of the conference. And more and even bolder monetary and fiscal stimulus measures are expected to be worked out this year to accelerate China's economic growth, probably in early March when the annual National People's Congress (NPC) and Chinese People's Political Consultative Conference (CPPCC), commonly referred to as the "two sessions," will be held in Beijing.  

During the two sessions, the NPC deputies will deliberate and vote on 2024 economic and budgetary plans, as well as detailed implementation steps. Chinese economists have urged the NPC legislators to prod for higher government spending by raising the budget deficit ratio to 3.8 percent or higher of the GDP, so as to sustain China's economic growth, which reached 5.2 percent in 2023, one of the highest growths among major economies. 

Some international organizations including the World Bank and the International Monetary Fund (IMF) have forecasted that China's 2024 GDP will grow by only 4.5 or 4.6 percent rate, which is largely downbeat or pessimistic in the eyes of most Chinese economists. 

It's suggested that China should aim for a relatively high growth rate, in the range of 5 percent in annual GDP expansion in 2024 and 2025, in order to create a larger pool of social wealth that could benefit hundreds of millions of ordinary Chinese families, support fiscal spending in urban and rural infrastructure, education, medical care, elderly pensions, national defense, scientific research and technology innovation, as well as the Belt and Road Initiative and other important programs. Also, a higher growth rate could help generate crucially-needed jobs for unemployed young people.

The financial work conference by the leadership also emphasized the need for building a modern financial system with Chinese characteristics. A modern central bank would be able to grasp live pulse of the economic activity, including price variations and subtle changes in employment situation, keep abreast of global economic ups and downs and international financial market trends. The central bank should be proactive in adjusting monetary policy to prevent any emerging risk of inflation or deflation, and should work to minimize the impact of offshore financial crises. 

It is believed that the PBC still has a good policy maneuverability room to prop up the country's economic development. The Central Bank Governor Pan Gongsheng, during last week's press conference, announced the RRR cut or quantitative policy easing. Pan also hinted at a possible interest rate reduction or qualitative policy easing in the near future. The timing could be hinged on the US Federal Reserve's next move to bring down America's roof-top interest rates, expected in March or April. 

Currently, Chinese policymakers face a constraint as China's benchmark one-year loan prime rate (LPR) of 3.45 percent is much lower than the US' interest rate. Enlarging the gap will cause more capital to exit from Chinese market.

Nevertheless, China's central bank has more means at its disposal to propel the economy. Just as Pan stated, the PBC has policy tools to support the central government in selling more treasury bonds, which has been hailed by Chinese economists as necessary to stimulate fiscal spending and government investment at a time when the country is facing a pattern of negative monthly consumer price index (CPI) since October, indicating rising deflationary pressure. 

Financial strength enables growth. In 2024, China has the financial capacity to accelerate economic growth as Chinese banks are now holding a massive pool of savings equal to 288 trillion yuan ($40 trillion) across all types of entities and Chinese households, according to a report from the State Council Development Research Center. The country can tap into this wealth to accelerate investment on a wide array of fields, such as expressways, bridges, tunnels, high-speed railways, urban metro systems, intra-city housing refurbishment, reservoirs, new energies, electric vehicles, 5G towers, aerospace exploration, AI, semiconductors, robotics, quantum computing and more. After China realizes higher levels of industrial automation and productivity upgrade, the country's economic competitiveness in the world will be further consolidated. 

Building up financial strength is crucial for China's long-term success. The Chinese economy has demonstrated remarkable resilience in 2023, recovering from the three-year pandemic crisis. As we enter 2024, the economy, supported by a significant tick-up in government spending programs and easier bank loans enabled by the central bank, will most likely gain new momentum and keep forging forward, acting as a major engine of the Asia-Pacific region and the global growth despite persistent volatilities and the "decoupling" and de-globalization headwinds in the world. 

The author is an editor with the Global Times.