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Special> Coping With the Global Financial Crisis> Expert's View> Observer
UPDATED: May 24, 2009 NO. 21 MAY 28, 2009
Diagnosing the Financial Industry
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BIG SHOTS GATHERING: Chinese central bank governor Zhou Xiaochuan delivers the keynote speech at the Lujiazui Forum held on May 15-16 (CFP) 

Heads of the nation's top economic and finance watchdogs gathered together at the Lujiazui Forum held in Shanghai on May 15-16. The forum, initiated in 2007 and aimed at becoming a Chinese version of the World Economic Forum in Davos, was themed "finance and economic growth in a globalized age" this year.

High-level attendees included Zhou Xiaochuan, Governor of the People's Bank of China; Shang Fulin, Chairman of the China Securities Regulatory Commission (CSRC); Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC); and Wu Dingfu, Chairman of the China Insurance Regulatory Commission (CIRC). The following are edited excerpts of their speeches at the forum.

Zhou Xiaochuan: China—not a risk-taking country

We learned from the financial crisis that financial institutions should strike a balance between taking risks and controlling them. Some financial institutions have turned from risk-prone to risk-averse in the wake of the financial market debacle.

Judging from the current investment situation, China is not a country that is willing to take high risks, nor are its financial institutions or companies.

In the past, China had huge GDP accumulation but low per-capita income. The Chinese people preferred to save rather than spend, hence the savings rate in China is higher than in many countries in the world.

However, the fallout from the global financial crisis has stopped them in their tracks, as their overseas counterparts have suffered a lot from the bold moves in developing financial derivatives.

If China is going to become more globalized and encourage independent innovation, our enterprises need to have the risk-taking spirit, and that spirit needs to be heavily promoted.

Shang Fulin: More needs to be done in the capital market

The value of China's stock markets is now the third largest in the world. The Shanghai Stock Exchange is the fourth largest stock exchange after the New York Stock Exchange, Nasdaq and the Tokyo Stock Exchange.

However, we must be soberly aware that China's financial industry development still lags far behind that of developed countries. Domestic financial institutions must be reformed to offer better financial services to other industries.

First, the foundations of the capital market must be further strengthened. Listed companies should establish a sound mechanism to increase returns to investors and set up a dividend distribution system. Well-performing companies should be encouraged, but companies that perform poorly should be eliminated. Listed companies should be encouraged to carry out mergers and acquisitions so as to upgrade their industrial structure.

Second, a growth enterprise market should be created as soon as possible. Relevant rules and regulations will gradually be enacted to guide small and medium-sized enterprises (SMEs) on how to get initial public offering on the stock market. The financing problems of SMEs could be resolved through the establishment of the new stock market.

Market efficiency must be promoted. Fund management companies should contribute more to stabilizing and perfecting the financial system. New futures contracts will be introduced to diversify the current futures market. Financial institutions should actively research cross-border investment tools to strengthen the competitiveness of Chinese capital markets.

Fourth, market supervision will be improved to prevent potential risks. The CSRC will tighten supervision over cross-border capital flow. Illegal behavior like market manipulation, insider trading and profit transfer will be punished.

Liu Mingkang: Banks should return to their traditional role

Financial institutions including banks, securities companies and insurance companies should reflect on their structural problems as revealed by the financial crisis.

Banks in particular should focus more on their traditional business activities like lending, and traditional wealth management projects like credit cards and international settlements.

The blind pursuit of profit only leads to severe defects in the banking system itself.

The salary system needs to be reformed in line with current financial development. After the financial market meltdown, financial institution bosses were condemned for their huge salary packages. That led to the same accusation against domestic financial tycoons.

Their salaries should be pegged to their performances. A rational and fair salary system should be set up so as to mobilize workers at all levels, combining short-term and long-term interests.

We found out that after the financial crisis, institutional investors tended to prefer short-term trading rather than sticking to long-term investment strategies. This needs to be addressed as soon as possible.

Banks and other financial institutions should readjust and optimize their customer coverage. In the banking industry, services for SMEs fall far short of services for big companies and big clients. In the current economic slowdown, SMEs not only have great development potential, but also can make huge contributions to social stability and employment. Domestic banks, especially small and medium-sized ones, should shift their attention to cultivating and funding SMEs. They should stop competing with big banks for big clients; instead, they should cater to the funding needs of SMEs, where they have comparative advantages.

Wu Dingfu: China is the most promising insurance market among emerging economies

In spite of the daunting challenges imposed by the financial debacle, the Chinese insurance industry has managed to maintain sound and relatively fast development so far this year.

The economic slowdown has lowered demand for insurance. Some foreign insurance companies encountered collective cancellation of insurance policies among Chinese investors who feared the sprawling financial turmoil might be the straw that breaks the foreign insurers' back.

Coupled with the rising costs of interna-tional reinsurance, domestic insurance companies had a hard time managing their assets.

The CIRC adopted a string of measures to stabilize the market, which so far have paid off.

In the first four months of this year, nationwide premiums totaled 414 billion yuan ($61 billion), rising 9 percent compared with the same period last year. The total assets of insurance companies reached 3.5 trillion yuan ($512 billion), growing 200 billion yuan ($29 billion) year on year.

This 9 percent growth was hard won, as it was calculated on the basis of a 39-percent year-on-year increase last year.

To date, the risks in the insurance industry are controllable.



 
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