(The Queen Elizabeth II Conference Centre, London, 6 February 2012)
Ladies and Gentlemen,
It’s a great pleasure to attend the City Week 2012 and this International Financial Services Forum.
This is a most valuable forum in which to share insights.
There is a great need for dialogue as we are in the fourth year of the global financial crisis. It is only through discussion that we can build the mutual understanding needed to secure stability in the financial markets of the world.
Over the past four years, whenever the word ‘Finance’ is mentioned, it has always been associated with the financial crisis.
When ‘Finance’ and ‘London’ are put together, the first thing that comes to people’s mind would probably be London replacing New York as the world’s number one financial centre.
And when talking about ‘Finance’ and ‘China’, what do you have in mind?
My answer is: historic progress.
Today I will share with you my analysis of the historic progress of China’s financial industry.
Since the collapse of Lehman Brothers in September 2008, the crisis has rolled around the world. As developed economies have stumbled, China’s economy showed strong resilience.
At the same time, the Chinese financial industry weathered the external shocks and achieved historic progress.
Now, let me explain what I mean by ‘historic progress’.
First, China’s financial industry is more competitive.
China has introduced sweeping reforms to its financial institutions.
This ambitious plan transformed the ‘Big Five’ stated-owned commercial banks, namely:
· Industrial and Commercial Bank of China;
· Agricultural Bank of China;
· Bank of China;
· China Construction Bank;
· and Bank of Communications.
Each of the ‘Big Five’ has evolved into share holding financial groups.
Over the past few years, these banks have strengthened corporate governance and raised profitability.
The result has been dramatic.
The global ranking of the top 10 banks is no longer dominated by American, European and Japanese banks.
Today, the Industrial and Commercial Bank of China and other Chinese banks have become heavy-weight players in the world.
In late November 2011 the Chinese financial industry was valued at 119 trillion RMB yuan, or 11.9 trillion pound. That means a rise of 149 percent from the year end of 2006.
By September 2011 Chinese commercial banks’ capital adequacy ratio reached 12.3 percent. That is up by 5 percent compared to five years ago.
Also in this period, their non-performing loans ratio dropped to 0.9 percent from 7.1 percent.
My second point about ‘historic progress’ is to highlight the growing maturity of China’s financial markets.
China now has strong and maturing financial markets. They have diverse products and trading facilities that reinforce each other. These are some of the key points:
· By late 2011, there were 2,342 listed companies at the Shanghai and Shenzhen Stock Exchanges. These have a total market capitalisation of 21.5 trillion RMB yuan, or 2.15 trillion pound. The Chinese stock markets now rank as the world’s second largest.
· With bonds China has developed an over 20 trillion yuan, or 2 trillion pound market, which ranks fifth in the world.
· Futures trading in China continues to rise. Markets now span agricultural products, metals, energy, chemicals and financial products.
· As a measure of a flourishing insurance market, this industry posted a record premium of 1.43 trillion yuan, or 143 billion pound, in 2011, which is about 3 times that of 2006.
· The forex market has also become more robust, attracting more traders and rolling out new investment products.
My third point about ‘historic progress’ is how China’s financial system has grown resilient to risks.
There has been very different approaches to managing financial market risks in the world over the past thirty years.
Over the past three decades, China’s macro regulatory reform has kept the financial industry well regulated.
The Chinese government policy used a wide range of tools:
· Fine-tuning was flexible and timely.
· There was the fine-tuning of intensity and pace of regulation in the light of the wider economic environment and market conditions.
· China employed a full range of measures including interest rate, forex rate, bank reserve ratio for savings and open market operations.
· Care was taken with money and credit growth.
· The lending structure was improved. China highlighted the value of the financial sector macro management.
· This meant that China struck the right balance among supporting growth, managing inflation and preventing financial risks.
· Tailored to China’s economic conditions, we have developed a more effective and coordinated regulatory structure. This covers the banking sector, securities trading and insurance services.
China has a long history of taking ideas from the rest of the world. We have adopted international concepts and standards to improve our regulatory approaches and vehicles.
At the heart of the Chinese risk management system is early warning of systemic risks and immediate intervention to prevent contagion.
At the same time, we have strengthened the institutional infrastructure and pushed for corporate governance to operate to higher standards.
All these factors explain how China has made ‘historic progress’ in the past four years of financial crisis in the developed countries.
What I hope to bring to your attention is that China is a serious student of the history of financial industry and global crises.
We are deeply aware of the centrality of the real economy in national prosperity. Chinese people know that the financial sector should have an important supporting role.
But at the same time, the financial sector should not expand excessively at the expense of the manufacturing base.
China provides crucial lessons for the world that finding the right balance of regulation of the financial sector is critical for winning stable and sustainable performance.
China will continue to keep financial innovation and financial regulation in balance.
On one side, we support the innovation of organisational structure, products and service models in the financial sector. China recognises that these are essential elements for the financial markets to reach greater depth and breadth.
On the other hand, we are determined to prevent the kind of innovation that sidesteps regulation or is divorced from the real economy.
My fourth point about ‘historic progress’ in China is that our financial industry is increasingly open to the world.
China joined the WTO just over 10 years ago. Since then China has delivered its commitments. This means China has significantly opened its financial markets and encouraged its financial institutions to operate globally. These facts measure the progress:
· Foreign financial institutions have expanded their presence and secured a firm footing on China’s market. Foreign banking assets in China reached 105.1 billion US dollars.
· By September 2011, 14 wholly owned foreign banks and Sino-foreign joint-equity banks were registered in China. Now, 191 branches and 61 sub-branches of foreign banks are operating in China. There are another 242 offices of 183 foreign banks across the country.
· In the insurance sector, among some 40 global insurers on the Fortune 500 list, most have had operations in China’s insurance market. These include Standard Life, Prudential and RSA from Britain.
· China’s steady opening-up of its stock and bond markets is just as impressive and productive. A range of measures have been introduced, such as the (Qualified Domestic Institutional Investors) QDII scheme and the (Qualified Foreign Institutional Investors) QFII scheme. By the end of 2011, 135 qualified foreign institutional investors had been cleared to invest in China’s securities market.
· The reforms towards a managed floating RMB exchange rate and a market-driven interest rate scheme have made progress. China has signed 1.3 trillion RMB yuan, or 130 billion pound, worth of bilateral currency swap agreements with 14 countries and regions. The fact that nearly 10 percent of China’s international trade annually is settled by Renminbi points to a significant rise of the currency’s global status.
· China is keen to further deepen its global financial cooperation. We are an active participant in global economic and financial governance. Increasingly our voice is heard at key international forums. For example, China is now holding more quotas and voting shares in the IMF and the World Bank. China’s role and contribution in the G20 is now welcome and influential.
In my analysis of the ‘historic progress’ of China I have been reflecting on trends in the past thirty years.
So what about ‘forward progress’ for China and its participation in global financial markets?
As we are in the UK I will focus on Britain and London as the world’s leading financial city.
I will give you these ‘forward progress’ answers by trying to read the minds of some Chinese and British financial leaders.
Let me start with Chairman Lou Jiwei of China Investment Corporation. He might say: “Increase financial investment in Britain.”
In January, CIC announced its equity investment deal with Thames Water. This was a major step following last November’s China-UK infrastructure investment initiative.
This deal came as a wave of Chinese businesses are showing greater interest to invest in Britain. The areas of capital inflow include a broad spectrum of sectors, such as:
· Advanced manufacturing;
· Creative industries;
· Research and development;
· And infrastructure.
By the end of 2011, China’s direct investment in Britain totaled 2.3 billion US dollars. What’s encouraging is that almost half that amount – or 1.13 billion US dollars – was invested in last year alone.
I have confidence as our two-way investment rises to a new level, the financial communities in China and Britain will have more opportunities to collaborate.
Now, how might Chairman Shang Fulin of China Banking Regulatory Commission answer the question about ‘forward progress’? This may be: “Strengthen exchanges with British financial regulators.”
We meet at a time of global economic and financial storm.
For the regulators worldwide, fixing institutional weaknesses and rebuilding the financial industry is the number one priority.
This is clearly an area where Britain can show its strength. As part of its financial regulatory reform, Britain has set up the Financial Conduct Authority.
Compared with the UK, financial regulation is relatively young in China. Our regulatory experience is not nearly as much as that of our British colleagues.
That’s why Britain’s reform agenda, fresh thinking and policy implications can be of great value for China. These topics should be front and centre between Chinese and British decision-makers in their financial regulatory dialogues.
What is on the mind of Chancellor George Osborne in terms of ‘forward progress’ with China? He has made it very clear: “Build London into an offshore RMB centre.”
This was an initiative on the agenda of the 4th China-UK Economic and Financial Dialogue last September.
On his China visit last month, Chancellor Osborne agreed with Hong Kong Monetary Authority on building collaborative ties on RMB trading.
The hope from the British side is London can over time become a RMB offshore trading centre as a supplement to Hong Kong. This is a good plan that should be worked on by the two countries.
Another obvious answer on ‘forward progress’ on China can come from HSBC Chairman Douglas Flint. HSBC has made it clear: “List the HSBC stock on the international board of the Shanghai Stock Exchange.”
So far, the Shanghai Stock Exchange has given no broad outlines on how this will happen. Nor is any timetable of an ‘international board’ emerging.
But China’s policy position is clear and consistent. We are determined to attract committed international players to list on Shanghai’s capital market. And we support the issuing of Renminbi stock by qualified corporations outside China.
Policymakers in China are now laying the groundwork for an institutional framework. Clearly the HSBC and the Standard Chartered are trying to catch the early tide.
What might be the answer on ‘forward progress’ from President Zhang Yun of the Agricultural Bank of China? This is likely to be: “Launch the bank’s operations in Britain.”
In just three days from today, the Agricultural Bank of China (UK) Limited will officially open in the City. This marks the moment that all the Big Five state-owned commercial banks in China have established presence in London. By the end of this week each will have one subsidiary.
I encourage Chinese and British financial institutions to follow the example of those forerunners. They should seize opportunities to strengthen exchanges and deepen co-operation.
For this to happen, Chinese and British governments and regulatory authorities should also take up their responsibilities. This means they should work together to create a pro-business environment for our financial communities to chart a successful path forward.
As we ‘progress forward’, a clear consensus has emerged between China and the UK. The financial industries are an area where China and Britain have a huge potential to cooperate with each other.
All of us seek one objective.
This is stable and sustainable financial markets and a win-win future for all.