The State Council of the PRC has set out the blueprint for the nation’s overall financial policies in 2009 in a set of opinions that came into effect on December 8, 2008. The opinions, entitled the Several Opinions of the General Office of the State Council on Providing Financial Support for Economic Development, Guobanfa (2008) (No.126, the Opinions), implement one of the 10 measures issued by the State Council on November 5, 2008, on the strategic economic incentive plan of RMB4 trillion that is to be carried out before the end of 2010.
The Opinions lay out nine general policies concerning the financial sector, including loosening monetary policies, improving credit lending services, developing the structure of the capital market, exploring the utility of insurances, creating new ways to finance enterprises, easing control over foreign currency, and enhancing the quality of financial services.
To ensure the adequate supply of currency and maintain sufficient liquidity in the banking system, the State Council increased the credit scale of policy banks by RMB100 billion in 2008. The National Development and Reform Commission (NDRC) announced on December 18, 2008, that the central government has distributed that amount among six sectors:
- The construction of affordable housing (RMB10 billion);
- Infrastructure in rural areas (RMB34 billion);
- Key infrastructure, such as railroads, highways, and airports (RMB25 billion);
- Health, medical, educational and social projects (RMB13 billion);
- Energy-saving and environmentally friendly projects, such as urban sewage and waste treatment facilities, key water pollution prevention projects (RMB12 billion); and
- Projects involving self-innovation and industry-upgrading (RMB6 billion).
The Opinions encourage commercial banks to extend supplement loans for government invested projects, in order to increase the total amount of loans offered to financial institutions by RMB4 trillion in 2008. The government also set goals to increase the broad money supply (M2) of 2009 by 17 percent, and reduce the number of bills issued by the central bank and its public market operations, in order to inject currency into the market and encourage the extension of loans by commercial banks.
The Opinions state that loans will primarily be extended to support important industries with focuses on people’s livelihoods, agriculture, rural areas, the construction of crucial projects, reconstruction after catastrophes, energy saving, pollution reduction, technology and innovation, mergers and restructuring, and the harmonious development of various regions in China. On the other hand, loans to uncompetitive enterprises within industries that have high energy consumption, heavy pollution, and excessively high levels of productivity must be restricted.
To support the development of small- and medium-sized enterprises, the central government encourages local governments to contribute to and establish credit insurance funds and institutions, and requests financial institutions to increase the percentage of loans provided to small and medium-sized enterprises. The export of products with self-developed intellectual properties or brands and those with high added value will also enjoy the preferential interest rate on sellers’ credit offered by Export-Import Bank of China.
To facilitate industrial transfers, the Opinions encourage financial institutions to develop new credit products, and support the transfer of excessive domestic production abroad. Also, the Opinions call for more loans to rural areas, and urge the Agricultural Bank of China, Agricultural Development Bank of China, Postal Savings Bank of China, and rural credit cooperatives to further exercise their functions and expand their related service scopes. Moreover, the Opinions ask the government and other parties to cooperate in establishing a market-orientated, rural credit guarantee mechanism.
The Chinese government seeks to establish a multi-layered capital market, which would include the main board market, the small- and medium-sized enterprise market, and the growth enterprise market, in the near future. The Opinions encourage qualified enterprises to merge and restructure by utilizing the capital market, which commentators predict could be a possible driver of the Chinese stock market in 2009. Additionally, the Opinions state that commodity futures relating to grains and steel will be created. They also call for an increase in the scale of bond issuances, including enterprise, corporate and short-term financing bonds, as well as mid-term notes. According to the Opinions, the Chinese government will explore the possibility of allowing foreign institutions and enterprises to issue RMB bonds in China, and may allow Hong Kong enterprises and financial institutions that have significant businesses in the mainland to issue RMB bonds in Hong Kong.
The Opinions encourage insurance companies to invest in national, financial, enterprise, and corporate bonds as institutional investors. The government will guide insurance companies to invest in transportation, telecommunication, energy, rural infrastructure construction, and large, important state-owned enterprises. The Opinions point out that the government allows commercial banks to offer domestic and foreign enterprises loans for their merger and acquisition (M&A) transactions. On December 6, 2008, two days before the Opinions were issued, the China Banking Regulatory Commission (CBRC) released the Guidelines on the Risk Management of M&A Loans Extended by Commercial Banks permiting commercial banks to offer M&A loans to domestic companies, and to partly remove the prohibition on PRC banks from financing equity investments. Additionally, the Opinions ask financial institutions to test the grounds of real estate investment trust funds.
The government also encourages innovative investment channels that can turn idle public funds into worthy investment capital and, in turn, into substantial economic growth. The current crisis in the stock market has resulted in more investments of capital in the equities of promising pre-IPO companies. Thus, equity investment funds are becoming a popular investment tool that has so far been less developed in China. According to NDRC, the Administrative Measures on Equity Investment Funds are to be promulgated in the coming months. These measures are expected to clarify many of the related issues, including the registration, tax policies, and institutional investors of the equity investment funds. Together with the Security Investment Fund Law, which has been in effect since 2003, the upcoming administrative regulations are expected to help promote a better developed capital market.
As for the control of foreign exchange, the Opinions advocate for improved and simplified relevant settlement procedures. According to the Opinions, advance payments or deferred payments may constitute up to 25 percent of an enterprise’s total annual payment settlement amount in foreign exchanges, a significant increase from the previous 10 percent. Consistent with this principle, the State Administration of Foreign Exchange (SAFE) issued Circular 73, on December 23, 2008, to improve the administration of foreign debt registration under enterprises’ trade in goods. The Opinions also allow financial institutions to loosen the criteria for the cancellation of bad debts on agriculture related loans and small and medium-sized enterprise loans. The tax departments are also called upon to simplify the reviewing procedures for financial institutions’ bad debts, in order to help these institutions clear up bad assets. The Opinions also vow tax preferential treatments for agriculture related loans, guarantees and insurances.
The Opinions indicate that the modernization of financial services is necessary. This includes forming a richer system of payment instruments, increasing the efficiency of capital circulation, ensuring the correct and on-time arrival of government subsidies, and establishing a credit system and an evaluation system for the credit and bond markets, among others.
In light of the current international financial crisis, the government has set up goals to ensure the stability and safety of financial operations in the future. These objectives require, among other measures, that relevant institutions study and closely follow the current status of financial markets, prepare strategies to counter emergency issues, and perfect the supervision and disclosure system of financial markets. Commercial banks and other financial institutions must further their reforms in corporate governance and become an essential part in carrying out the monetary policies of the government. Finally, local governments are called upon to cultivate a healthy financial environment within their jurisdictions.