This allows Huijin to do more market -oriented operations as market needs.
Are they really permitted to penetrate into more of the private sector?
Now we're witnessing the next chapter of the reform of China's financial system.
The chat lounge unpack views and opinions on hot issues in a more casual way.
Welcome to the chat lounge, I'm Ching Tze Yun, joining our discussion on how the consolidation of state -owned financial firms will influence China's financial sector, or Andy Mock, senior research fellow at the Center for China and Globalization, Dr. Liu Baqiang, the Director of the Center for International Business Ethics, University of International Business and Economics, Beijing, and Dr. Li Lun, Assistant Professor of Economics, Peking University.
Thank you for coming back to the chat, gentlemen.
Welcome. China has conducted another major asset reshuffle to overhaul its financial sector.
The Ministry of Finance has transferred all of its controlling stakes in a group of financial firms to Central Hweijin Investment, which is a sovereign fund under the China Investment Corporation owned by the State Council.
So let's first examine the details of the transfer.
The financial firms are China Cinta, China Orient, China Great Wall, China Securities Finance, and China Agriculture Re.
So, Dr. Li, would you please give us a brief introduction to these five firms?
Why did the finance ministry have control of these stakes in them?
Absolutely. So within these five firms, I think three of them are different from the other two.
The three, basically Sinda, Orient, and Great Wall are called Asset Management Companies or AMCs.
So, if you look at their history, they're all like establishing 1999, in which period And China is witnessing rapid economic expansion but it's also accompanied by a surge in the so -called non -performing loans or NPLs, especially with the country's major banks, especially the state owned banks.
So these AMC's were created as state owned enterprises by the Ministry of Finance back in 1999.
Actually there were four, the other one is Huarong, we may be able to talk about it as well, But these four AMCs were established in 1999 mostly to deal with this NPL, which is constituting the significant portion of the portfolios of these major seoul banks.
So basically the government is founded these AMCs to mitigate the financial distress and on the other two companies, the first one is that China Securities Finance is established much later in 2011 after the Great Recession.
So basically it was created for another reason, mostly to address the volatility in China's security markets.
As you know, after the global financial crisis of 2008, there's a very large need for market stability, especially more regulation.
So China's Security Finance or CSF was designated to act as a centralized provider of liquidity.
So the last one, the Agriculture Reinsurance Corporate Limited is similar, but a kind of specialized in agricultural reinsurance, which provides basically reinsurance services to insurers, especially in the agricultural fields.
So these companies basically all serve, broadly serve China's finance sector, but they have different purposes and goals, and this move can be considered as a very comprehensive measure to stabilize the financial sector.
But some people say the assets were actually transferred from one pocket to another of the central government, Dr. Li.
What's the point of the asset reshuffle?
I totally understand, because by the end of the day, the owner of these companies are all basically the Chinese government, but the difference or the point of the asset -rich shuffle is the functionality between Huijin and the ministry of finance is different.
So previously, the ministry of finance have two rows at the same time.
One is ownership rows, basically it is the stakeholder for these four AMC s, but it's also an administrative sector of the government.
So, it also has the administrative oversight and market regulation roles.
And these roles sometimes have conflict interests.
So by doing this as a reshuffle, it basically takes the asset of these AMCs out of the balance sheet from the finance ministry and into the Huizin's basically balance sheet.
And this allows Huizin to take, for example, more risks.
It can also do more market -oriented operations, you know, as market needs, you know, everything doesn't have to be approved by the government.
Of course, the other side of the coin is that it's now bad by the chinese government in that sense.
So if Huijin fails, hopefully it doesn't.
But if it fails, it's no longer a liability that the Ministry of Finance have to bail.
Oh, not for a bit. We'll further explore the role of Huijin later on.
But Baozheng, what's your evaluation of this move?
How many birds do you think the authorities aim to kill with this move?
The consolidation actually is to legitimize the oversight by Huijin, because Huijin has the actuality, the management role in this company's or in this security.
One's anyway, because they have control in the share, and now they're intended one is to legitimize its governance and direct control.
The other is to separate hopefully the market operational performance versus the government in intervention, and then it is there to boost more of the efficiency, to make it more of self -governing, although the oversight is still very strong on the top, from the state council to the Ministry of Finance sector, because after all, it is probably the largest state asset.
The disadvantage lies in that it may be too big, and the consolidation in the internal culture can take quite some time.
And then if you really mention about the monopolistic issue, that's going to be further monopolized in the market and dominated.
The other is that whether its function to continue to feed in a matter of privilege to the state -owned companies, or are they really permitted to penetrate into more of the private sector?
That's also another question to be erased.
So it spans a competitive edge by a bigger capital with over 60 ,000 employees and now with capitalization of around five trillion, I should say.
So it is a humongous one.
Therefore it prompts actually even stronger oversight from the central authorities as how it goes because it's gonna create more of a shockwave either negatively or positively to the marketplace.
Mm -hmm. It seems a lot of concerns are there, but we'll dive deeper into that later on.
To Andy, can you tell us your interpretation of the timing of this move?
What prompted the Ministry to transfer its states in those financial institutions to central Beijing now?
Sure. Well to add a little bit of context before I answer your question.
I think it's easy to overlook just how radical and transformational a change China's financial sector has undergone since reform and opening in 1978.
So Professor Beall was very accurate to say that some of companies that have been transferred to central Huijing were these asset management companies.
And when we look back to that period in time, China's banks, especially the Big Four banks, so ICBC Bank of China, Construction Bank, Agricultural Bank were banks in name only because of the command economy.
So while they were called banks, they did not make loans using underwriting guidelines, risk assessment, etc. They were basically cashier's offices, right?
So the government would say here, make this payment, we'll call it a loan, to this entity.
So they ended up with all of these non -performing loans, and for them to go public to transition to being true banks where they were evaluating risk, lending money based on sound commercial principles, these loans had to be moved off their balance sheets so these big four banks could also IPO and otherwise get equity injections to become not only the successful organizations they are to be, but some of the largest financial institutions in the world.
So this is all context to say that these AMCs have really succeeded phenomenally in playing a role.
So why now? So one of the important things I think to recognize about central Huizin that it's been alluded to earlier, is that it is a subsidiary of the China Investment Corporation, CIC, which was China's sovereign wealth fund.
And because of this, but however, Huizin is focused purely on domestic activities, whereas CIC invests all around the world.
The other difference is that Huizin has a policy focus.
So their goal is not to maximize financial return but to support the policy objectives of the PRC.
So they do this through holding equity stakes in the big four banks, again, ICBC, the CCB bank of China, also bank of communications as well.
So because of this, they have, I think a concentration of expertise, especially in the domestic financial sector.
So So why is it being put under central huiting?
I think why now? I think there's two reasons.
One is that it is part of the ongoing structural reform of China's financial system.
So again, while tremendous remarkable progress has been made over the past few decades, more needs to be done and I think this is an important milestone.
There's also, I think, situational factors.
Of course there's the challenge of the real estate problems that China is facing that still need to be resolved that are also affecting China's banks and other financial institutions.
But also I think it's well recognized that bolstering confidence in China's financial system is very important.
So increasing confidence amongst both domestic investors and foreign investors is very important.
And I think as we'll probably touch on the market reaction to this move has shown that this is having a positive effect on investors sentiment.
So I would say just to briefly wrap up, first of all, that China's transition to a more market driven economy, especially with the big four banks having to unload their quote unquote non -performing loans has really demonstrated the success.
these asset management companies who then have transitioned and added to their activities.
But now we're witnessing the next chapter of the reform of China's financial system as well as a reaction to situational factors that the economy and I think China's financial markets are facing today.
The chat lounge. The chat lounge unpacks views and opinions on hot issues in a more casual way.
That's quite a detailed explanation of the reasons.
Like Dr. Li earlier mentioned, those asset management companies were supposed to get out of the control of the finance industry back in 2009.
But, obviously, it was postponed until now.
So, Dr. Li, you said it's for the sake of stabilization or stabilizing the market, but is it now the market is stabilized enough?
for those transition or transfer?
So I think 2009 is absolutely a very special period because it's right after the financial crisis globally.
So it's definitely not a good time to do the consolidation.
Why now is the ideal time?
Honestly, I don't have a good answer for that but I can definitely speak to, for example some of the central gradients role after the reshuffle and why those roles may serve as very beneficiary to the time now.
So, overall, I would like to summarize central Huijian's role using two metaphors.
The first is, I think it's somehow like a bomb disposal unit that you can find in armed police in the military.
So basically, it's stabilizing force in China's financial system.
And whenever you spot, for example, a potential systematic risk or financial distress, then central Huijian can be the one to kind of address these potential threats before they and escalate into bigger disaster.
So basically, it has more flexibility than the Ministry of Finance.
Another metaphor is that some of these non -performing laws can actually be seen as pretty good assets.
If you are familiar with the term ABS or asset backed securities in Western, in the US or other markets, they are packaged into securities that can be sold to individual investors.
So Huidin, in this sense, can act as a market -oriented intermediary, so it's sort of like, I read a quote from an online forum that says Hui Dinh is basically trying to extinguish market fire with market water, so I think it's well said because it can kind of package or re -label these MPLs into valuable investments at appropriate prices and also use all of these subsidiaries such as the other sale -owned firms to work through a strategic asset allocation at management and turn these non -performing loans, turn these challenges into opportunities.
So I think both roles are highly demanded now, especially when we're looking at increasing financial stability globally and also slowing consumption.
So I think this time is kind of the ideal time for the finance ministry to do this consolidation effort.
And then all in all, Huijin is now like the boss of those financial firms.
Then actually, Baochen really tapped into the challenges it may face.
You all mentioned Huijin's role.
Then let me ask each one of you, what would you say is the biggest challenge central Huijin will have to face in integrating these diverse financial entities under its management?
Baochen said that it's too big or too clumsy maybe to handle.
and also it's a cultural integration.
Baojun, what's your pick then?
Well, further details need to be ironed out as how they divide the supervising role from the state council versus the asset management commission versus the Ministry of Finance.
And because their managers are really arranged on a political or executive front instead of selected from the market, that's one question that needs.
So to what extent is it responsible for modest stakeholders?
So there needs further clarification.
Second, how the oversight can continually be exercised so that the prevention of the corruption can be carried out because there has to be a number of bad cases over that.
And then how to address the bad debt.
Because initially, ministerial finance would like to have more time to manage the bad debt issues and now with the changing dynamics with the evenness of the central government to give a better landscape of Chinese economic performance and also the financial marketplace so this is really introduced despite of some of the constraints the other is that how they can really spread out over the market because if you compare with some other sovereign funds they are really getting more of the return from the global marketplace spreading into a different level of basket.
But now, at least so far, the Chinese asset management companies they basically make profit out of the Chinese companies, particularly the state -owned companies, state -owned banks.
So these are really the issues that they need to consider in making them really globally competitive, and also globally accountable, so that they can also be more attractive to global investors into the fund.
So be aware that all their capitalization is drawn from the bond issued by the Chinese Central Bank.
So they are operating basically on the on the debt anyway, so therefore further responsibility, accountability, transparency will be required.
But doesn't it have any advantages, right?
You said it's a But another sovereign wealth fund, like a Norwegian sovereign wealth fund, it got, like, somewhere about 1 .8 billion US dollar assets.
But after the consolidation, wouldn't Central Hukwejin become more, you know, powerful when it comes to, you know, it got more firepower in stock, right?
Yes, of course, you know, the scale itself is on the advantage, because you can really beat up other competitors particularly in big projects and also in long term strategic investment.
So that is absolutely true, but the challenge is still there.
When the operation is too big, bureaucracy definitely will get nurtured and the different level of understanding in the central mandate can also take place.
So decision -making can be slow.
So these are really the issues that of all big companies, not only the Chinese one, so all big operations will have to face.
That's true. And to Andy, what's your take there?
Well, I think to add to what's been discussed, any kind of reorganization, acquisition, presents challenges, right?
So just you have your generic integration risk.
But I would say here that with central Huizhin, that they're a little bit different from a sovereign wealth fund.
So first of all, of course, they're focused, I believe, exclusively or at least primarily on domestic entities within China.
And second, they are actually fairly active.
So they are significant shareholders as I mentioned in the big four banks, but they actually exert fairly direct influence.
Again, being the government's representative to ensure that the entities in which it is an investor aligned with national policy objectives is very, very different.
So your typical sovereign wealth fund, even a CIC is primarily a financial investor looking for risk adjusted returns.
Whereas I think of simply as a little bit more involved activist perhaps is the word that we can use.
And certainly because of its focus on the financial sector in China.
I think size of course can make things more bureaucratic, slow things down.
But at the same time, they also have a very broad and deep view because of their shareholdings in these different financial institutions that may give them a very powerful knowledge advantage in managing these new entities more effectively.
So to offer a little bit more of a positive take on this.
Right, and Dr. Li, do you have any idea how many assets will Central Waging have after this consolidation then?
Well, I've read many statistics.
I think it's somewhere around $6 trillion to like $10 trillion, so that's the number.
Dollars or... go on.
RMB. Alright. All right.
That's around one trillion US dollars.
So, but I mean, I can definitely resonate to both Andy and Professor Liu's argument about too big to fail.
I think I would like to add to it is, you know, I think we have to to avoid the so called moral hazard problem, basically, meaning that when the asset managers within central hui jin or within any of its subsidiaries, feel like that central hui jin is this humongous entity that can't fail at all.
This could encourage their excessive risk taking behavior, which might actually lead to really unstable outcomes.
So whether it's too big to fail, I think, basically, we have to have more regulatory power within central Huijin, especially across its different subsidiaries, to make sure that these excessive risk taking does not happen.
And another potential challenge that I can think of is on the real estate market, especially the second and third -tier cities.
So as we are observing some of the cities, there are foreclosed properties that need to be handled.
So Central Queejin, especially after it has consolidated these huge AMC's will have huge stock of these foreclosed and mortgage properties.
So, what it does to these foreclosed properties, to these mortgage -backed assets, will have a huge effect on the local supply in the housing market in the second and third -tier cities.
So this could cause many unintended consequences for property values for local economies and it could even bring broader financial repercussions.
So this is definitely something that I would advise central cohesion to care about.
To all the issues I really want to raise, if they are not challenges, one is that because the full subsidiaries that is being put together under the arm of Heejin, they have different functionalities.
They also have different profit rates.
The performance is pretty much polarized.
Like, they are not really up to speed, as a matter of fact.
So, how to consolidate the business, exercising expertise to leverage the different performance?
So that's quite a much bigger responsibility.
The other is that President Xi has been quoting talks with Chinese private companies, leaders.
You know, he emphasized on level playing fields between the state -owned ones versus the private companies including banks or whatsoever.
So now, how the central Huijin after consolidation is going to serve to such strategic purpose and by having equal access or financing by those private companies.
That's also another question that they need to take into consideration.
So you're saying that actually central Huijin doesn't have any good firewalls, if it will, to fend off those problems, potential problems there.
No, I mean it's pretty much a, say, a capacity issue, you know when you are getting too big and how do you really coordinate that requires higher level of expertise and skills and also the streamlining all the bureaucracies, because all combination mergers take a very long time to address different culture, different expectations of the previous different organizations together.
And the other is that because Hui Jin, they are created to address strategic issues serving as government arm to deal with the financial marketplace and the primary service and support the state -owned banks, and then, you know, how those private banks, because you see along the street there are so many private banks are being treated, are they going to have equal access to the support of the central ou -yin.
That's also another question because the central government has been calling on, time and again, to have equal access by private sectors to all types of treatment from the policymakers, including those policy banks.
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Welcome back to the Chat Fl L.
Should we continue our discussion on the latest consolidation of China's state -owned financial firms?
Andy, do you see any trend of those issues or problems being refined as of now?
So, if I understand what Bao Chang was saying is that so in the commercial lending market in China, we, of course, have the big four banks that are dominant and they're state -owned and Huijin has controlling shares in these four banks.
And does this mean that the private banks will be disadvantaged?
Is that the question?
That's right. Because for example the non -fulformal loans by the state owned banks can be taken care of by Huijin or subsidiaries.
But this is not really the equal treatment to the private banks so far.
Right, I think that's a great point.
So basically there is not a level playing field for the private banks, like I guess that would be like Ming Sheng and Bank of Communications—that they can't compete effectively against the big four because of the advantages these big four banks have because of the Huijing backing?
That's right, because they are given a metaphysical and a macro -level, they are there to show up to Chinese economic performance, financial stability, etc., but their immediate objective is still to service the state -owned banks.
Now, you know, how about those private banks which are supposed to have equal access to such a set of policy or policy changes?
That's my question.
That's a great point, right.
But I guess it depends who matters more, right.
Because we think about the enterprises that are the customers of banks, right.
Whether that's a private bank or a state own bank, as long as they have inexpensive, relatively friction free access to credit, do we care that the private banking sector, China is not doing that well?
That's quite a question because what I gave as an example is that non -performing loans by state owned banks can be taken care of by Huijin or subsidiaries, but non -performing loans by the other commercial private banks, particularly those based on private capital, can they also receive such sort of treatment?
So I guess, my own view to you, to answer your question, is that, and maybe because I'm not, I shouldn't say concerned.
But it seems to me, the bigger problem is that small businesses, big businesses, consumers have access to inexpensive credit, right?
And as long as that happens, like those shortcomings, that black cat, white cat, as long as it catches mice, it's a good cat.
We really care that the private banks are disadvantaged.
I'm not sure. So it seems to me that if you're a private bank owner or shareholder, you would care a lot, but if I think about the macro economy, do we really care that much as long as credit audit is available in reasonable terms, right?
Which is what commercial banks do, right?
They provide credit.
So I can even see an argument.
Having the big four dominate is a good thing.
As long as they're not monopolies and, you know, exploiting their customers, it's a good thing.
Indeed, actually, the market has responded quite positively, though I know there are a lot of concerns there, especially those are mentioned by Baocan, but the general sentiment seems quite positive, right?
At this moment we've already seen the stock market.
The major index has actually increased after this news, right?
So maybe those problems, they are very challenging, but it'll take some time for them to solve the problem.
Obviously, like occurs that a lot of things are waiting to be clarified.
But now back to the prospect of this central waging?
Maybe to Dr. Li, how would you assess its value in stabilizing the financial market, which is obviously a quite vital goal, target of the central government at this moment?
Yeah, before doing that, I'd like to briefly comment a little bit or add some of my insight on the, basically, private versus government lending problem.
So I think, given this, the current macroeconomic landscape, the problem right now at this very moment, it's not the oversupply of credit, but it's rather an under -demand of credit.
So basically we're seeing that loans are not growing as swatted and the profitability of banks are kind of having this instability.
So whether the loans are given out in the form of government backed banks or shadow banks or private banks, I think right now, the central goal for the government is to encourage lending, to encourage spending, and to kind of revitalize the market.
So in that sense I think having this consolidation effort basically take care of the accounts or the non -performing loans or the problematic side of the balance sheet so in that sense in the short term it actually I think it gives the market a boost because the announcement of such reforms it kind of creates investors in confidence and also it's in all sense it's step to a more modernized financial sector.
So in that sense, I think that's the reason that explains the stock market increase.
But overall, I think it is crucial that we're not giving out too much loans in the long run, and we're not giving risky loans to those who cannot afford to repay them.
So in that sense, economic fundamentals, or R and D expenditure, or the increase in total factor productivity, then that is what explains the long term growth of stock market and our GDP.
I think as long as we're providing sufficient funds to fast growing companies, we should be in good shape.
So you're suggesting there's a small and medium size firms still may not be able to get the loans they need?
No. What I'm saying is that I think right now, the borrowing cost in China is fairly low.
And I think the borrowing constraint for small and medium sized firms is not the major problem that is faced by them or that is the major problem that this consolidation is trying to solve.
I think the main reason for this consolidation is first to take all of these potentially risky assets or non -performing assets out of the Department of Finance balance sheet and put it back into the market.
and second is also to have this unified oversight to create this stabilizing force that kind of can solve the problem once they have rises.
So I don't think that basically the dis -consolidation effort is trying one way or another to solve, like for example, the borrowing constraint problem that's being faced by small enterprises.
Now I think now the positive response from the stock market indicates the meeting of the expectation of long waiting line in the confidence of those investors, but now this optimism how long is going to last that also remains to be seen you know how these reforms can really produce tangible improvements in the performance of those effective institutions, and also the more of the sustained transparency and effective communication from the centralized central cuisine can also be delivered to those entities involved in maintaining the sustained trust of those investors.
So these are really the expectations we would like to see that central huajing can really deliver.
Right. Andy, you were saying.
Yes, so if I can just jump in.
I wanted to respond to what Drestor Li was saying or ask a couple of questions.
So one is that while the official cost of credit, the interest rate is very low, How accessible is credit to small and medium -sized businesses, right?
Because my understanding is there's a lot of other of what I would call friction or you know just whatever it's not necessarily easy even though the official interest rate is low for businesses to get credit.
But I take your point that it's a problem of demand for credit, generally not so much supply and here you know the observation I'd like to offer is that the market right, whether we're talking domestic investors, businesses, or foreign businesses and investors is that they, one, want to see the government doing something about this problem, right, first of all?
And then second, doing things that make sense.
So if we look at this, first, with the meeting that President Xi had, this is the rehabilitation of Mayun, right?
Which is a huge positive signal to the market that it's safe to make investments to start businesses, to increase business activity because nothing bad is going to happen to you, right.
And then the second signal is that, okay, we're going to do this restructuring and put these entities under central Huijing because this is the entity that has the accumulated expertise, it has the responsibility for representing the government's interest in the financial sector.
So to me, you know, it's passes the smell test, right?
So first of all, the government is showing, okay, we recognize something needs to be done and they're doing something.
And what they're doing makes sense.
So, Professor Li, I don't know what your thoughts are about that, especially about the real access to credit for businesses in China.
Yeah, so I think those are very good questions that I can only provide my personal insight.
So well -known that they own enterprises basically have no problem at all It's accessing so I understand that your question is mostly about private companies So I think it's a it's a long standing myth that you know The problem about borrowing is that they can't get access to Cheap credits because you know, there are lots of FinTech's or shadow banks that can provide even many times non -collateral required loans.
If we're talking about small amounts, for example, a couple hundred thousand yuan, those are usually accessible.
If we're talking about larger, for example, in a couple million dollars, those are more difficult.
But it's all a matter of price.
What interest rates are high, is my understanding.
Yeah. So the ongoing rate right now is at, I think, a historic low level.
Because I think but many reason is that there's a lack of demand for this credit basically we're seeing a large amount of savings and deposits sitting in these banks and they're having trouble to give loans to the small enterprises so even though we're not saying that they can borrow at two percent or three percent or at a reasonably low level i'm saying that if we're looking at the entire history after 1970s I think right now is the borrowing costs for small firms are much lower than the historical levels.
The only problem is that many of the private enterprises, because their market shares are being taken up by, you know, state owned enterprises, they lack the inner motive to expand and invest and to borrow.
And this lack of demand for credit, I think it's more problematic than, you know, they want to borrow money, but they can't.
The chat lounge. The chat lounge unpacks views and opinions on hot issues in a more casual way.
I'm sure to expand financing access to private firms as, I should say, a major target of those moves.
The good news is that we've already embarked on this path and maybe more importantly this move by the finance ministry this time is we're targeted at this market -oriented governance structure which is the key to addressing the doubt, very often raised by international rating agencies and to streamline the structure or the functionality of China's financial market.
It's the first step.
Then let's get back to this reaction to the move.
We've already seen, we've just mentioned that the market, especially the stock market, has responded quite positively, I should say.
Then how do you think this would affect investors' sentiment in overseas market or foreign investors and their perceptions of China's commitment to financial sector reform?
Parcham? Yes. I think this reshuffle signals China's central government commitment to further reforming the financial sector, which has been elongated by both domestic and foreign investors, and it also hopes that they're going to improve the corporate governance, and this will definitely positively influence the foreign investor's perception over what is going on in China, and plus that the central government has been sending out more signals to further open the market, which used to be restricted, particularly in the financial sector, telecom, healthcare, etc. Because, you know, those investors
do not only invest in central Huijin or the Chinese stock market, they really wanted to participate in the Chinese economic growth.
And now, at the moment, my understanding that most of those large investors, they feel that they They got their finger burned, not for the blame of the Chinese government, but due to the COVID period.
And now they are still holding the money and see that whether this commitment is going to be further enhanced by more of the implementation.
And now with the consolidation of central Beijing, they really still wanted to see what is really the prospect.
Are they going to really operate on a market -oriented basis?
and also the separation of the regulatory power versus the operational capacity is going to be further delivered.
So these are really the issues.
So therefore it is not the single operation of the consolidation of the sovereign finance, but rather it has to do with the macroeconomic policy, and also how whole other Chinese stakeholders would really respond to it.
And the last I could think of is that, you know, are they going to provide, again, the same level of clean fields to many other sectors, particularly to support those small and medium sense companies and support those hidden campaigns that is going to prosper?
As we have previously talked about, the private sectors can borrow money easily, if they have tangible assets, that's going to be evaluated, and that's going to be mortgaged.
Otherwise, it's going to be very difficult, but that requires more of the Chinese financial managers really to enhance their own capability in further scrutinizing the prospect of some small and medium -sized businesses as how they grow.
So that's part of risk management, but they cannot really in the oversight, such explosive growth of those small companies who can really shoot very high and even turn out to be unicorns in a short period of time.
Right, and like Bhajan earlier mentioned, there was this upbeat sentiment on the stock market, but the question is how long it can sustain.
Andy, what's your expectation?
Well, I think certainly to Yun that the hope is that this is a sustainable increase, Right?
So, on a fundamentals basis, Chinese equity markets are still cheap on a PE basis.
I think we're in a transition from fear to greed, right?
So, there was a lot of pessimism for various reasons towards Chinese equity markets for a number of years.
I think that there's certainly reason for optimism.
And we see foreign investors like David Tepper from Appaloosa, right, as being one of the most vocal and visible foreign investors who have said, you know, now is the time to be all in on China.
So I think sentiment matters a lot.
You know, I've always been very optimistic about the fundamentals of the Chinese economy.
There clearly are short term challenges that need to be addressed, including the transition to a new productivity driven growth model that is largely tech -based.
And I personally believe that, you know, we are witnessing this with deep -seek, you know, other advances that are being made that the long -term fundamental outlook is very positive from an equities markets perspective.
It's really just a question of sentiment.
And I think that the Chinese government, again, with this recent meeting with top private entrepreneurs, the moves we're talking about today with central Huiting now is also, you making it a priority to improve sentiment domestically and overseas.
Right. And one more question.
The ability of those asset management firms handling bad asset or non -performing assets after this consolidation.
Dr. Li, what's your evaluation?
Actually, a lot of people say, you know, in the past, they're engaged in making quick money by doing some side businesses, but after the consolidation, they are required to focus on some core business like handling non -performing assets.
So do you think their ability would be hampered or kept up after this consolidation?
Would that be a big concern?
Well, it definitely has to be observed in the future, but in the sense that Central Huizin is now kind of consolidated all the competitors in the market, especially for these AMC's I think right now my concern within these domestic AMC's is not that they're you know not taking enough risk, but is instead that they're taking too much risk.
If what you're saying is precise is that when they're kind of contracting to a more core business or more central roles after they are being merged into Hui Jin.
I think overall that's going to be a good thing.
So, I mean, in terms of the future, what other stuff that central Hui Jin can do after this consolidation, I think if it can contribute a more positive role in either addressing our real estate market or addressing the local government debt management, those are going to be hugely beneficial to China's economic outlook.
Of course there are many ways that you can do it.
For example, the more aggressive ways to address local government debt is to kind of have some debt to securities swaps, basically having convert local government debts into securities.
But there could also be other ways to kind of address the property market challenges.
So I think we now have, instead of having many small competing players in the field, we now have one really powerful player.
So I think that the real question is not about its efficiency, currency.
But rather, whether it's taking too much risk at too fast a pace and whether it's really kind of solving the core problems that, you know, affects the long -term economic outlook for China.
Then what do you expect the central waging would do after this consolidation because a lot of investors, especially domestic investors, expected to come up with more eye -catching moves on the financial market.
What do you expect it may usher in?
Well, I don't want to make any predictions that you know, later to not to be false, but I think overall, it's a net provider of liquidity to market.
So it has all of these animals.
Well, I mean, it could, for example, increases holdings in specific sectors, for example, hold more ETFs, or I don't know, it could tap into, as I said, real estate markets, you know, provide liquidity to real estate developers, or it could address something to, for example, the local government borrowing vehicles, these Chongjia Ha, or local banks… I think there are many things that it could do to kind of provide more market liberalization and also more transparent practices.
So overall, I think by doing the consolidation, Central Whittington is becoming more and more an important financial infrastructure in some sense that it's a net liquidity provider for basically all across the financial sector.
Right. Andy, what's your expectation?
Maybe something more closely related to the daily life of ordinary people like me who doesn't have any investment in the stock market.
Well, I think it certainly can to you, but it will be, most likely, indirect versus direct.
The same way that a central bank sets interest rates that may not directly affect the lives of consumers but does have a very profound impact because the price of money affects everything.
But I would say here that central housing directly, they're an investor, first of all, So they're not, as far as I know, not likely to be very directly involved in many of these activities of the companies of which they are significant shareholders in.
But what we, hopefully, and I believe the intention is that we will see improvements in these companies that are now under the central Huixing umbrella, and whether that's elimination of redundancy, as Professor Li talked about, right?
The sort of consolidation reducts streamlining, so making faster, more effective management decisions.
Huijing as an important shareholder would certainly bring perspective, expertise as well as information about important policy initiatives, right?
So I think that again, to paint the positive case here, you know this could be very good for the operating companies individually and as a set, right.
As an ecosystem if you want to think about it like that, that with one well -informed the powerful, knowledgeable, significant shareholder that can improve individual performance of companies as well as the portfolio of all of the companies as well.
Dan, Baojun, very briefly, what's your expectation there?
We would expect that they have the right, transparent institutional structure, where shareholder responsibilities are being clarified, and we hope that they're going to have more of the independent board to oversight instead of simply listening to some government officials in the decision -making process.
And then they also are expected to enhance the risk management skills in terms of the building the stress test models and also the risk assessment mechanism so that more of the sophisticated investment can be handled, particularly to support those firms that has a big potential but badly need the money without much of the tangible asset to support.
Much of the expectation lies from the Chinese people, where, for example, if you hold any share in the stock market, you would expect that those companies can really benefit from these consolidations so that they're going to deliver more of the expected income to those even smaller investors.
Like you all mentioned or suggested, the overhaul of China's financial system is actually a comprehensive project.
And then last but not least, let's zoom out a little bit to the overall picture.
Apart from the asset reshuffle this time, what else urgently needs to be done to enhance, you know, governance efficiency and market competitiveness of China's financial sector which is I think the most urgent task of the authorities right now.
Shall we begin with Hao Xiong?
Yeah, I think the much of the support is really consumed by the state owned companies.
They also have a dominant role not only in the Chinese economy, but also on the stock marketplace.
So therefore, the institutional restructuring of the central Beijing, if they are able to synchronize with the deepening of the reform over the Chinese state owned enterprises, that will be a more decisive, positive solution to that regard.
And then the other is that whether they have got to deal with the bad assets or not performing loans in a market driven way instead of simply trying to the central policymakers, that would be highly appreciated.
Right. And Andy, please.
Well I think you know what China is doing here is really forging its own path to modernization and this includes the financial sector as well so you know I think there's a lot of unknowns but certainly you know again if we look at the historical track record you know you can't argue with that so I would say stay tuned.
Yes of course. And last but not least Dr. Li please.
Yeah. So I definitely agree that I think having more private sector participation, having lower barriers to entry for private and foreign banks, could be a net positive to first foster competition and also foster innovation within and across different sectors in the economy.
And finally, I think overall, the most beneficial purpose of the finance sector is to provide credit to those fastest growing sectors to provide liquidity to those that need it the most.
So I think overall, having more efficiency, having more investment in technology and talent, those are the things that China's financial sector can aim to target and reform.
And on that note, we wrap up the session of the chat lounge.
Many thanks to Dr. Liu, an assistant professor of economics, Peking University, the Indimag Senior Research Fellow at the Center for China and Globalization, and Dr. Liu Baochung, the Director of the Center for International Business, Ethics, University of International Business, and Economics, Beijing, for sharing your time and very enlightening insights.
The show is available on all major podcast platforms.
Please email us your comments at RadioAtCZGN .com.
Thanks to you, and thank you for listening.
Join us for more chat at the chat lounge next week.
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