I need to thank the organisers, and particularly the Folks’s Financial institution of China (PBC), for inviting me to affix the annual Monetary Avenue Discussion board. It’s a nice honour to be talking at this vital occasion. My solely remorse is that I’m not capable of be a part of you in particular person. I nonetheless keep in mind vividly the symposium on RMB internationalisation that the BIS co-organised with the PBC in Beijing one 12 months in the past. The BIS values its easy and shut cooperation with the PBC through the years. I hope that I can go to you in China someday quickly.
Uncertainty has elevated, hindering consumption-led progress
The Covid-19 pandemic has elevated uncertainty and pressures on corporations and households globally. International locations like China have proven that these issues may be overcome with sturdy coverage measures. Like many different central banks, the PBC stretched far with coverage actions to supply liquidity and help households and corporations in the course of the disaster. The most recent IMF World Financial Outlook means that China is the one G20 financial system which is able to rebound this 12 months.1 Different international locations are studying from its expertise.
The hope is that the uncertainty will subside globally over the following 12 months. Nevertheless, within the close to time period, the pandemic and the anxiousness it generated will nonetheless dominate. In lots of economies, households have elevated their precautionary financial savings and restrained their consumption. The most recent information from China present that financial progress has been led by authorities funding in infrastructure, whereas shopper spending and exercise within the service sector have struggled to maintain up.
The short-term challenges posed by the pandemic haven’t saved China from persevering with to pursue its longer-term reform agenda, which is to maneuver to a extra consumption-led progress mannequin. Making consumption a stronger supply of progress would assist China’s transformation to a service-oriented financial system, create extra inside financial stability and scale back the publicity to exterior shocks. Such rebalancing may also improve productiveness and promote a extra sustainable and environmentally pleasant financial system.
Many coverage actions and reforms might be taken to assist obtain this goal. I want to spotlight two of them at the moment: monetary market deepening and technological innovation as helpful channels to help financial rebalancing.
A strong and environment friendly monetary system might help with the financial rebalancing
After the Nice Monetary Disaster, China launched into a multi-year programme to spice up home consumption by selling shopper credit score markets, enhancing social security nets, growing the service sector and elevating family revenue from investments. However family saving charges stay excessive – notably precautionary financial savings from lower-income households. If folks’s well being and pension outlays had been safer, households may save much less, as they would want to set fewer sources apart to cope with uncertainty. From a macroeconomic perspective, safer social safety may scale back the dependence on self-insurance, and produce the combination nationwide financial savings to a stage higher suited to the nation’s improvement stage and demographic construction.
The Covid-19 pandemic has heightened uncertainty and expectations of upper future well being care and dwelling prices, particularly for the aged. Subsequently, accelerating the event of social security nets in China, together with a extra environment friendly pension system, would have nice advantages at the moment. The disaster may thus have a silver lining.
A deeper and extra diversified monetary sector – together with a extra dynamic pensions market – has a lot to supply right here. Insurance coverage markets are an instance. With out medical health insurance, all of us can be saving extra individually than what is required collectively. Properly functioning insurance coverage markets that guard in opposition to dangers of enormous, unexpected medical bills would thus assist increase consumption.
China’s monetary markets have already deepened over the previous few many years. Market capitalisation of credit score devices has elevated by 27% yearly between 2010 and 2019. International participation has additionally elevated. This extra numerous investor base has enhanced market liquidity.
However extra may be accomplished to make monetary markets each supportive of consumption-led progress and extra resilient. In line with a latest report by the BIS’s Committee on the International Monetary System,2 relative to its financial weight China nonetheless has a restricted presence of home institutional traders, akin to pension funds, insurance coverage firms and different long-term asset managers. The organisational construction of markets issues because it has vital implications for market liquidity, competitors and effectivity.
On this regard, pension market progress is usually a catalyst for growing deep and liquid capital markets. Institutional traders, together with pension funds, might help enhance market liquidity, contributing to depth of buying and selling and the event of spinoff merchandise and hedging devices. Skilled traders additionally are likely to deal with long-term funding potentials and thus assist scale back herd mentality and irrational market actions.
A dynamic pension market brings different advantages. Pension funds have a tendency to buy bonds to again the regular money flows for pension members, so their participation can help the event of bond markets and improve the indicators supplied by market rates of interest for the implementation of financial coverage. In the meantime, higher use of fairness markets, together with extra institutional investor participation and extra sectoral range for listed firms, might help shift from capital-intensive progress to the extra intangibles-intensive funding that caters to the fashionable service-based financial system. By decreasing the burden of the banking sector in intermediating financial savings, whereas rising that of institutional traders, China can increase its long-term progress prospects and diversify its monetary system. As well as, if the banking sector comes beneath stress, securities markets may also function a worthwhile spare tire.
In sum, by selling high-quality financial savings for the long term, growing a dynamic and diversified pension market will assist to take away uncertainties and issues which might be holding again present consumption and help China’s efforts to rebalance its financial system.
Expertise might be a helpful automobile to channel reforms
How can know-how assist? Now we have already seen in China that technological advances have remodeled the nation’s fee system and helped speed up banking sector reforms. China now has a novel alternative – in addition to an added urgency – to leverage its huge digital ecosystems and new know-how to broaden and deepen its well being and pension providers.
Digital providers can help well being care provision. Earlier than the pandemic, massive know-how corporations in China already leveraged their networks of knowledge collected from prospects’ on-line exercise to enter the personal insurance coverage business and insure the beforehand uninsured at inexpensive costs. This may be scaled up additional. The pandemic has stimulated the event of digital drugs platforms to make sure secure and fast physician session.3 These have been facilitated in China by the authorities’ determination to have public medical health insurance cowl sure on-line medical providers.
Digitisation may also increase monetary literacy, by familiarising folks with long-term monetary planning, together with retirement financing. Some huge techs have provided robo-advisory providers to supply customers with retirement-related instruments (akin to saving calculators, comparative details about varied pension merchandise and normal recommendation).
Within the medium time period, technological innovation can pace up pension reforms in China. For one factor, fintech options may handle some ache factors encountered within the ongoing reforms. As former PBC Governor Zhou Xiaochuan has identified, distributed ledger know-how can be utilized to deal with funds from a number of sources for a single insured particular person, thus enabling pension portability.4
The hot button is this: know-how is a increasingly more integral a part of our lives. Over the long run, know-how – along with monetary sector reform – might help China transition to a extra resilient service-based financial system, and meet its sustainable progress goals.
A strong monetary system and a local weather conducive to technological innovation – which the authorities in China have been fostering for a while – can be extra useful than ever within the post-Covid-19 world. Collectively they will handle three present challenges that China faces: decreasing uncertainty and boosting consumption; bridging to the medium-term objective of consumption-led progress; and enhancing the standard of useful resource allocation within the financial system.
We on the BIS will proceed to do our half, from each our head and our regional places of work, to foster cooperation amongst central banks world wide to help each monetary stability and monetary innovation.
1 IMF, World Financial Outlook: an extended and troublesome ascent, October 2020.
3 See C Cantú, G Cheng, S Doerr, J Frost and L Gambacorta, “On health and privacy: technology to combat the pandemic“, BIS Bulletin, no 17, Could 2020.