Mr. Duoguang Bei, the co-chair of Chinese Academy of Financial Inclusion, made a speech on January12, at the 23rd  China Capital Market Forum and emphasized that the key issues in finance system is how to optimize the financial structure. We should pay attention not only to the financial resource, but also the end user of financial assets. The prominent problem in the current system is the lack of effective service for the mass population, which, as a result, would damage the financial and economical development.

I would like to elaborate mainly on financial restructure today, drawing on what we have been talking about so far. We have seen multiple discussions over the related topics, be it in the field of economics or finances, with focus more on aggregation than structure, the latter of which, however, stands as the more pressing matter under the current financial circumstances in China.

It is brought up in last year's Central Economic Work Conference that 'we shall prioritize financial system reconstruction', which means that the key issue when it comes to financial system is the structural optimization. I would focus on this point today as I could not emphasize enough the importance of it.

Generally, a financial system structure consists that of financial market, financial organization and financial assets.

As clear as the structure seems to be, the financial system is essentially a complex one that integrated various parts that function together. For example, the financial market includes bond, stock, money, and foreign exchange markets etc., at the same time, the foreign exchange market is also part of the monetary market, and the convertible bonds could be placed in either stock market or bond market, therefore, the structure in nature is very complex one to say the least.

There are two embedded structures in the financial system, which I consider as the two core factors: the Interest Rate structure and the Term Structure. The Interest Rate structure refers to the price of the financial assets; the pricing varies among different kinds of financial assets. In a market economy, a distorted financial assets pricing system naturally leads to disorders in the financial market, a dysfunctional market so to speak. And the unique nature of the Term Structure determined its essential role in the whole system. We all know that the currency has a time value, so the difference set in the Term structure could either enhance the efficiency of the system, or crash it. To put in simple words: interest rate is determined by its term and its risk. The higher is the risk, the higher is the rate; the longer the term is, the rate is usually higher as well. Here is just a few common sense in finance.

Also, research on financial structure or financial system would inevitably extend to other related matters. One good example would be Financial Intermediary. As the medium, on one hand it concerns the holder of the financial assets, including family units, corporations, and other financial organizations; some organizations are holders of financial assets themselves, in other words, the inner structure of Financial Intermediary is intertwined. Some are organizations for wholesales, some for retails, and some involved in the economy as Financial Intermediaries who are dedicated on purchase of financial assets owned by other organizations. On the other hand, the Financial Intermediary connects with the financial asset issuer, such as corporations, family units, and governments etc.

One may wonder, with such complex financial system with both its inner structures and its extensions, what are the prominent issues that requires our immediate attention right now?

First, issues regarding financial assets structure. It often came to our attention about the high financial leverage common to Chinese corporations? Or rather what is high debt ratio? And often in long term. The debt ratio, especially for many provincial governments remains high for years, with the tendency of being raised even higher recently. And what's the reason behind all that?

Second, issues regarding interest rate structure. we observe the tendency of the investment basically moving from rural to urban areas, from west to east coast, from developing-challenged to fast-developing areas. What is the main cause behind all these? And why? Is it a result of our interest rate structure? why is it so hard to solve the problems of 'hard to finance, costly to finance' issues which drew much attention of the policy makers? What about the privilege interest rate and finance interest discount policy? Do they work effectively? Do they help improve optimate interest rate structure in return? Or does it make it worse? These are all questions that we shall constantly check through when it comes to restructure and optimization.

Third, issues regarding term structure. why the local governments constantly are at risk of high debt? The frequency of high debt risk alert goes off almost every 3 to 5 years now. It is extremely hard to find LP, long term investors nowadays. And why? One might go beyond the scope of finance for the answers.

Fourth, issues regarding financial service structure, the finance assets issuer structure. They are the recipient of the finance service. Within the current service structure, small and medium-size business are often excluded from the financial system support, and this is exactly why we need to improve and develop Inclusive-Finance. Why they are still rejected of the opportunities, for a long while, even if there are many favorable policies issued over the years? The current money policy is very much structure-based, and there are various policies with priority to support small and micro-size business, then why they couldn't receive any financial support? It indicates problems in the 'passing-on' mechanism of those monetary policies. To optimize the structure, these are issues that we must address and deal with accordingly. Ignorance of such problems might end up misleading the related policy-making.

Let me elaborate on this for a bit further. How shall we deal with the issues of high debt ratio and risky high debt level that the local governments are constantly facing nowadays? Let's have a look at this meeting hall, we all come in through the entrances, right? But where are we going to exit? That would be the same entrances where you came in, right? The same theory applies to the financial system. When you are looking for the solution to the high debt, high leverage, first you must realize that these are the debtors. Where there are debtors, there must be creditors. Right? So, it naturally leads to the next questions, which is, who are creditors? And why they kept loaning credit? Isn't it simple to solve all these if they stop loaning money to the debtors? And more importantly who is loaning out money to the local governments? Certainly not the common people. The creditors are the financial organizations, insurance companies, local commercial banks, they are all the major creditors of the local debts. why? Why the agricultural commercial bank keeps loaning money to the local government when they are designed to provide service the 'agricultural industry and famers'? The answers will float up if you keep digging. In the current financial environment, it is essential and reasonable for them to be the creditors of the local debts. It makes sense, economically. This explains some our financial policies are hitting the wrong targets, to solve the problems, you must ask the creditors, and ask the questions from their perspectives.

It is critical to look at various financial problems within the whole financial structure. we can't talk about finance for finance's sake. Instead, we must be aware the 'controlling hand' of the finance service system, which means that we need not only pay attention to where the money is from, but also who is using it.

My main research focus on the 'user' in the finance system i. e. the service structure or the demand structure of the system, or the structure of the issuer of the finance assets. This very component, in my opinion, is the weakest link in Chinese financial structure. The current economic structure is in a pyramid shape, however, the financial structure is in the shape of an inverted pyramid: an obvious over-excessive service supply to those high-end clients, in which most financial system prioritize their service for the few high-end clients according to the '2 to 8 ratio', such as local government, high-profile corporations and individuals, in contrary to insufficient support to the small and micro business and individual minorities. As well accepted that the average revenue of the so-called Chinese middle class is RMB 60,000 yuan, which amounts to 300 million people, but there are around 1billion population below that income line. The key issue lies in the lack of effective service and support to the population at the pyramid bottom. This is the core to solve the financial structure problems. And this has become the major barrier for the financial and economic development of the country.

And I would like to offer a few solutions to the above-mentioned problems based on my research:

First, we have already reached the agreement on the importance and the meaning of the development of Inclusive Finance. However, I was often reminded by the experts that we shall also be alarm to the potential over-supply of such service. It is positive to notice the banks of all levels become to develop their own Inclusive Finance services, however, this shall not turn into a 'movement', and It should not be a 'prototype' that apply to everywhere and anywhere. Each financial organization shall develop their own services according to their own specific financial environment. This I simply cannot emphasize enough.

Secondly，in the Central Economic Work Conference it is said that financial reform must be deepened with the restructuring of financial system as the focus, developing private-owned banks and reminding and realizing the original purpose of city commercial banks, agricultural commercial banks and credit organizations in rural areas. What is the original purpose for such organizations? My understanding is to serve the small and micro business, to further implement Inclusive Finance. It is the key issue we need to address, and one thing I must add on is that Inclusive Finance does not and should not be limited to the existing financial organizations. We all know that Professor Muhammad Yunus in Bangladesh is awarded Nobel Peace Awards for pioneering the concepts of microcredit and microfinance. He is the one who told me that do not trust or reply on the existing banks and financial system, simply because they don't have the genetic motivation to develop Inclusive Finance. He believes that one must establish a separate system for Inclusive Finance, and that's why he set up Grameen Bank, together with it, he is awarded the Nobel Peace Prize. I think he went a little too far at this point. It is true that we haven't seen many traditional financial facilities delivering a good Inclusive Finance system, however there are a few successful cases, and we all expected that China would be one of those exceptions. We couldn't ignore the great influence once the government got involved, so I'm optimistic about what we would achieve in the development of Inclusive Finance. However, we must also realize that we couldn't make any substantial progress if we solely depend on the existing banks and financial systems. We must set up non-bank financial organizations dedicated to Inclusive Finance services. Recently governor of the Peoples Bank of China also brought up about the role of the 'shadow' banking system. From my perspective, the major barrier in monetary policy 'passing-on' mechanism is the failure to recognize the value of the non-bank financial organizations, particularly those like small-size creditors, who deserve supports and promotions from the governments.

Thirdly, we know that Yunus's mode is still very much rooted in the traditional financial system, however, nowadays the digital Inclusive Finance mode in China became the true leading successful mode and we had genuinely enjoyed the benefits from it. We had gone through the digital payment phase and now is in the process of stepping towards the digital credit phase or the so-called digital micro-credit, and is forwarding into the digital finance management in the future. This is something we should be proud of. We shall intentionally nurture a friendly environment for those financial technology corporations, and appropriate supervision shall be applied too to ensure their healthy growth, which is also very important.

And fourthly, Inclusive Finance. Here the key concept is 'inclusiveness', which emphasize the financial system needs to be 'inclusive'. It goes beyond banks, to include bond, insurance and trust etc., to provide inclusive finance services, and the capital market has an important role to play in the system. We can see that comparing with other structural problems identified in the financial system, the service structure presents a larger range of issues.

Based on my research, I divided the development of Chinese financial system into three phases: the first phase is from the 80s of last century, during which we establish the basic modern banking system, then the second phase is from 90s till 00's of this century, for the capital market development, and now the third phase: Inclusive Finance. Inclusive Finance is the milestone of the financial system development, and I would welcome more participation to its research and development, which fortunately had been the trending in recent years.

And that is all for today, thank you very much for your attention.      

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