Preventing financial risks vital to economy

A potential homebuyer checks out a property project in Hangzhou, Zhejiang province, Dec 17, 2016. [Photo by Long Wei / Asianewsphoto]

At the National Financial Work Conference last month, President Xi Jinping emphasized the need to prevent systemic financial risks, because finance is the core competitiveness of a country and financial security is a significant part of national security. The goal of financial work is to serve the real economy while preventing risks, for which financial reform is necessary.

Internationally, the US Federal Reserve's interest rate rise and balance-sheet cuts have increased the pressure of US-dollar backflow and tightening liquidity on the global market. Therefore, it is important for the domestic financial sector to take proper measures to prevent external risks.

Domestically, while reducing overcapacity, deleveraging and adjusting the economic structure, China has entered a period of medium-to-high growth. So the regulatory loopholes in the mixed operation of the financial sector have to be plugged to prevent risks.

Since serving the real economy is the goal of finance, the authorities have to prevent financial risks to ensure stable development of the national economy.

The financial sector has developed rapidly along with China's fast-paced economic growth, which in turn has created many risks such as shadow banking, a property bubble, high leverage and local government debt.

The National Financial Work Conference stressed that financial regulation should be tightened by strengthening relevant laws and regulations, improving the corporate legal person management structure of financial organizations and reinforcing the construction of the macro-prudential management system.

Since the first National Financial Work Conference in 1997, the central government has continuously taken measures to improve the financial regulatory system. Last month's conference decided to establish the "Financial Stability and Development Committee responsible to the State Council, China's Cabinet, with the aim of improving the top-level design of preventing financial risks in an all-round way.

The conference also decided to enhance the central bank's responsibility for macro-prudential management and systemic risk prevention. Besides, local governments have been asked to shoulder the responsibility of risk disposal. And to prevent financial risks, the authorities should establish a sound financial system. To start with, they should implement measures to ensure the financial organization system works to the optimum level, and improve the State-owned financial capital management and foreign exchange market mechanism.

They should also take steps to improve the modern financial enterprise system and external market discipline while plugging the loopholes in financial regulation. In this regard, the Financial Stability and Development Committee will help raise the level and coverage of financial regulation. However, the success of those measures will depend not only on top-level design and institutional improvement, but also on whether or not the regulators fulfill their duties.

The National Financial Work Conference has asked financial regulators to more strictly implement regulations and the local authorities to control local government debt.

To prevent financial risks, it is necessary to establish a financial-risk monitoring system, and a warning and early intervention mechanism. Therefore, the regulators should also strengthen integrated regulation, connectivity and information sharing, in order to prevent and/or dissipate risks, especially in key sectors.

Financial risks increase with the rapid development of new business models and financial products. So, to continue deleveraging and prevent such risks, the authorities should deepen financial reform and stick to steady monetary policy.

Finance being the lifeblood of the economy, preventing systemic financial risks is one of the most important economic tasks. As such, the conference made comprehensively preventing financial risks a very important task, in order to ensure the financial sector better serves the real economy and promotes the healthy development of the national economy.

The author is a researcher at the Chongyang Institute for Financial Studies at Renmin University of China.