A Signal to Accelerate Financial Reform

The market speculated about future changes in Chinas macroeconomic policies after the National Bureau of Statistics released this years third-quarter economic growth rate， which slowed to 6.9 percent. In response， the countrys central bank—the Peoples Bank of China （PBC）—sent a positive signal to the market. It announced reductions of interest rates and reserve requirement ratios for banks on October 23. The central banks move is supposed to ensure stable economic growth and stabilize the yuans exchange rate.

In my opinion， the central banks “dual cut”is a strong message of accelerated financial reform， rather than an effort to stabilize economic growth and market expectations. The central bank said in its official statement， “the deposit interest rate floating ceiling will be removed for commercial banks and rural cooperative financial institutions，” indicating financial reform will be significantly accelerated， and marketoriented interest rate formations are finished.

Chinas economic growth is now slightly slower than before， and a continuous drop in the consumer price index has greatly alleviated inflationary pressure， which is conducive to reducing interest rate fluctuations. This is a good opportunity to further advance the marketoriented interest rate reform.

Recent analysis shows that Chinas economic growth is likely to slow further， increasing uncertainties in the countrys financial reform and market development. However， rather than pause， Chinas financial reform has accelerated.

Premier Li Keqiangs remarks at a recent discussion with the financial industry reveal the government is changing from merely relaxing its monetary policy and increasing the money supply to pressing ahead with market-oriented financial reform.

The market-oriented financial reform will be carried out in the following aspects： As access to the financial market is lowered， it will be easier for private investors to set up banks. As the interest rates and exchange rates are reformed， pricing of the yuan in domestic and foreign markets will be more market-oriented. The construction of a multi-level capital market will be accelerated. Finally， the process of the yuans free capital account convertibility will speed up， and the capital market will further open up to foreign investors.

Breakthroughs in the yuans free capital account convertibility will be made in the China （Shanghai） Pilot Free Trade Zone. The State Council decided on October 21 to gradually improve the yuans free capital account convertibility and study how it could allow qualified domestic individuals to make overseas investments.

In January 2013， the central bank announced it is preparing for the Qualified Domestic Individual Investors （QDII2） program， but little progress has been made.

The monetary authority stresses risk control. One of the reasons for the slow progress in the yuans free capital account convertibility is macroeconomic risk concerns. The PBC once said China will adopt a managed convertibility. After the yuan becomes fully convertible， the central bank will continue to manage transactions under the capital account， including controlling cross-border capital flow risks through macro-prudential measures， and maintaining exchange rate stability and financial security. The central bank has left room to reform the QDII2 to avoid the possible damage that excessively radical reform measures may cause to financial stability.

Wang Xiaoyi， Deputy Administrator of the State Administration of Foreign Exchange（SAFE）， said at a press conference on October 22 that China will press ahead， step by step， with the process of setting up the yuans free capital account convertibility in order to ensure the risks are under control. According to Wang， economic growth fluctuations will not impact Chinas efforts to improve the yuans free capital account convertibility. With no current timetable for the QDII2， China will further open up the capital account.

In response to a question about exchange rate intervention by the central bank， Wang said intervention in the foreign exchange market is made by all central banks in the world， and SAFEs examination of abnormal corporate behavior should not be classified as an intervention. He added that the capital outflows from China are reducing， and SAFE is considering forex transaction tax to curb speculations through large， short-term cross-border capital flows.

Against the backdrop of the economic slowdown and the reforming and opening up of the financial industry， China has to meet different demands for financial opening up. This has caused some contradictions in financial policies and increased uncertainties in the future financial market. However， this does not mean China will not go further with financial reform.

China has become a net capital exporter， which will facilitate the yuans internationalization. Currently the progress of yuans internationalization in foreign markets is faster than that within the country. China must unswervingly push forward with the opening up of the capital account and become more deeply involved in economic globalization.