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New commission to improve financial security

By Chen Xiangguang | China Daily | Updated: 2017-08-15 07:49

Lujiazui is the main financial hub in Pudong, Shanghai. [Photo/VCG]

The recently established Financial Stability and Development Committee responsible to the State Council, China's Cabinet, is another important move to strengthen the country's financial security and help the People's Bank of China, the central bank, to better manage macro-prudential affairs and prevent systemic risks.

Since no financial system is foolproof and free of systemic risks, financial work should be aimed at protecting the financial system, for which macro-financial supervision is mandatory. The rapid development of financialization and globalization since the 1980s has also led to some regional and global financial crises. In fact, the global economy hasn't completely recovered from the global financial crisis of 2008.

Given these facts, the authorities should focus their attention on preventing financial risks in key sectors, improving financial security and building a strong risk-disposal mechanism.

Although China's systemic financial risks are under control, some risks such as those associated with bad assets, liquidity, shadow banking, property bubble, government debt and internet finance are gradually rising. Moreover, the large-scale international flow of financial capital is having serious impacts on China's economy and financial market, which could increase currency, capital flight and even sovereign debt risks, endangering the national economy.

Keeping these factors in mind, the Financial Stability and Development Committee was established to strengthen financial supervision, prevent systemic financial risks and boost financial security.

Finance is the bridge that links capital with different economic sectors. The proper distribution and redistribution of finance could improve overall resource distribution. In short, the role of finance is to serve social and economic development.

But the globalization of financialization has, in some cases, disconnected capital from the real economy, and resulted in finance coexisting with depression. Studies show that when financialization is divorced from real economic development, it could enhance financial speculation and instability, which in turn could disturb productive capital accumulation and harm the real economy. Over-capitalization increases the instability of financial markets and leads to asset bubbles, which could trigger a financial crisis.

The Financial Stability and Development Committee aims to take the lead in financial reform and opening-up, and build an effective systemic-risk prevention mechanism, in order to help finance facilitate social and economic development.

So the financial sector should improve the efficiency and quality of its services, and properly distribute financial resources to key sectors and the weak links of the economy to boost social and economic development.

To enhance the authority and effectiveness of financial supervision, there is a need to set up an innovative system in the financial sector, which is exactly what the central authorities have done by establishing the Financial Stability and Development Committee.

The financial supervision system under the People's Bank of China, China Securities Regulatory Commission, China Banking Regulatory Commission and the China Insurance Regulatory Commission has been operating for years. Being disconnected, the financial supervision departments couldn't always effectively coordinate plans to solve new problems, such as internet financial risks, liquidity risks and off-balance sheet activities.

The establishment of the Financial Stability and Development Commission will help strengthen coordination among the various supervision sectors and strengthen overall financial supervision. In other words, the commission could facilitate financial reform and opening-up, and promote the healthy, stable and orderly development of the financial sector.

The author is a professor of economics at Renmin University of China.


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