Section 5 Deepening and innovation of China's financial system reform
General Secretary Xi Jinping delivered an important speech while presiding over the 13th collective study meeting of the Political Bureau of the CPC Central Committee with the theme of improving financial services and preventing financial risks. On the basis of clarifying the profound relationship between finance and economy，he put forward specific requirements on deepening financial supply-side structural reforms，strengthening the capability of financial services to serve the real economy，preventing and mitigating financial risks，and deepening financial opening-up.He set the direction for promoting the high-quality development of China's financial industry and pushing forward the financial development with Chinese characteristics，and provided guidelines for the current and future financial work. In particular，the new assertion of advancing the financial supply-side structural reform was put forward for the first time，which was a response to the new era and had great guiding significance.
I.Structural imbalances on the financial supply side require bold reforms of the basic institutions of the financial market
Since the launch of reform and opening up 40 years ago，China's financial service supply system with indirect financing as its main body has played a vital role in rapidly concentrating financial resources and promoting the implementation of national development strategies. However，with the decline of the core driver for economic growth and the deepening of economic restructuring，and in the face of the severe challenges brought about by the major adjustments in the global economic growth pattern，the rapid transformation of the information structure，and constraints related to labor supply，resources，and the environment，the current financial industry，which shows a severe lack of development in equity financing，and is dominated by indirect financing which is largely controlled by large and medium-sized banks，has become unable to adapt to the requirements of transitioning from old to new economic growth drivers，transforming and upgrading the economic structure，nor to provide sustained and sufficient impetus for continuous improvement of people's quality of life. There is an urgent need to adapt the basic system that the financial system relies on to the new era and new circumstances.
（I）The financial system dominated by indirect financing is unable to meet the transformation need of the real economy，which is mainly reflected by the mismatch of financial resources caused by structural imbalances in financial supply.
First，the mismatch between supply and demand has led to insufficient momentum for industrial transformation and imbalances in residents’ wealth structure. In terms of industrial transformation，building a financial resource allocation system that is conducive to the formation of innovative capital and supporting enough capital with strong risk tolerance to invest in innovation is an important approach to forming a national innovation advantage. The indirect financing business dominated by the banking system relies on credit and collateral，and is more suitable for traditional mature industries. As the core assets of strategic emerging industries are largely intellectual property rights and human resources，it is difficult to form stable cash flows required by traditional bank loans or bond financing in these industries. Small and medium-sized high-tech enterprises cannot guarantee income and profit at the early stage of their development，and often find it difficult to obtain bank loans due to their small scale and low credit scores. China's stock market has overly strict requirements for listing，its delisting system cannot be fully implemented，and the cost of violations is too low，which make it difficult to protect the rights and interests of small and medium shareholders or to help the continuous financing of enterprises. As an important attempt to improve the basic system of China's capital market，the sci-tech innovation board is at its early stage. The interbank bond market，exchange bond market and over-the-counter bond market are independent and separate from each other. The National Development and Reform Commission（NDRC）manages corporate bonds，CSRC manages corporate bonds，and the National Association of Financial Market Institutional Investors manages medium-term notes and short-term financing bonds. Different regulatory bodies and standards have led to uneven development of different types of bonds. Regarding the wealth structure of residents，as existing financial products and services are unable to meet wealth management needs，and the current wealth structure of residents features an overly high savings ratio，an overly high proportion of real estate investment，a high proportion of bank deposits，a low proportion of insurance assets and equity investment，and a low yield rate of wealth allocation，residents tend to have incorrect wealth concepts，wealth values and financial investment behaviors. The old financial system cannot adapt to a new supply landscape，which will inevitably reduce the efficiency of capital allocation throughout the entire financial system，intensify financial frictions，increase corporate financing costs，and distort the wealth structure of residents.
Second，term mismatches cause expensive financing and hidden systematic risks. Due to the lack of direct financing channels，the short-term funding supply of indirect financing does not match the real economy's demand for long-term funds. As of the end of 2018，China's corporate bonds in direct financing and balance of domestic shares of non-financial enterprises had accounted for only about one eighth of social financing stock in the same period，much lower than the over 70% proportion of direct financing in developed western countries. From the perspective of development needs，enterprises need long-term funds，but the term of indirect financing represented by bank loans is often relatively short. In order to ensure smooth operation，companies are struggling to obtain external financing，which will increase financial and operating costs. They will even run into a liquidity dilemma and thus have to use irregular financing channels with high interest rates，which will in turn damages business operations and even leads to bankruptcy. From the perspective of banks，as the main sources of funding for the whole society are bank deposits and wealth management products，and there is a lack of long-term funding sources that can be invested in，banks have to meet the needs of the real economy through term mismatches—providing long-term loans based on short-term deposits. Excessive term mismatches will inevitably increase the contribution of banks to systematic risks，and thus is not conducive to financial stability and financial security.
Third，capital structure mismatches lead to high leverage. The proportion of direct financing is low，yet the proportion of indirect financing is high，which leads to the structural imbalance between debt capital and equity capital in the capital structure of the real economy. China's equity financing accounted for only 1.9% of total social financing in 2018.Compared with the current international situation，China's total leverage ratio is among the highest in the world，and the leverage ratio of the corporate sector has remained high for a long time. The reason is that companies have been relying on indirect financing for a long time to obtain the funds needed for reproduction. Leverage constraints have actually challenged the old economic development model backed by traditional debt financing. To adjust the capital structure and effectively reduce the leverage ratio，companies must seek new financing channels in addition to indirect financing channels such as traditional bank credit. The proportion of corporate bonds and enterprise bonds in China's bond market is relatively low，and there are strict restrictions on and a single approach to obtaining equity financing currently，which has exacerbated the lack of funding for long-term equity investment. Most companies find it difficult to replenish capital and have to rely on profit retention，resulting in excessive debt financing，high leverage，and high operating risks.
（II）The financial infrastructure to be improved is not conducive to improving the quality of financial services and optimizing the business environment.
First，credit infrastructure. In recent years，China has repeatedly encountered the adverse situation that “after the central bank lowers the interest rate，the interest rate of the interbank market falls，but the financing cost of enterprises in the real economy remains high”. The interest rate transmission mechanism is not smooth enough，because an open，transparent and credible interest rate corridor has yet to be set up，the dual interest rate system of the benchmark interest rate for deposits and loans and the risk-free interest rate has not been eliminated，the distorted interest rate transmission exists in soft budget constraint institutions including many state-owned enterprises and local government-backed financing platforms，and more importantly，the credit system，as an important financial infrastructure，needs to be further improved. On one hand，China's domestic credit rating agencies have evidently low credibility and market influence；on the other hand，it is difficult to achieve true independence of rating agencies. In particular，local governments often interfere with third-party credit ratings. As a result，credit ratings from different platforms tend to be consistent and cannot be used to guide the pricing of interest rates. More importantly，an imperfect credit infrastructure means greater information asymmetry. In order to ensure asset safety，financing institutions，in particular banks，have to use collateral as a major tool to identify risks，which will weaken their risk identification ability and risk pricing ability in the long run. As a result，liquidity will be largely injected into state-owned enterprises，making it difficult to address the high cost and difficulty of financing of micro，small and medium-sized private enterprises and high-tech enterprises. In recent years，there has been situations featured with sufficient liquidity in the interbank market while difficult financing in the real economy.
Second，regulatory infrastructure. In recent years，affected by financial disintermediation，circumvention of regulation，regulatory arbitrage and other factors，the shadow banking system has formed layers of nested，complex and intertwined leveraged fund chains，penetrating banking，securities，trust，insurance and other fields. Funds often have to go through at least two，often three or four intermediaries before they finally arrive at the demand side of the real economy. With a large amount of funds invested in second-hand transactions of existing assets，“financial idling” has caused a decline in the overall use efficiency of funds in recent years. Due to complex and changing business models and the lack of statistical data，no consensus has been reached on the measurement of the “length” of the capital transmission chain，and it is still difficult for financial regulation to keep up with the pace of innovative fintech products. There are regulatory shortcomings and gaps. Financial innovations outside the scope of regulation can easily achieve barbaric growth in the short term. The closer relations between financial institutions will further promote the homogeneous resonance of risks，which will bring more risks to the financial market and is not conductive to the healthy growth of financial innovations.
Third，the cost of violations of laws and regulations in the financial sector，especially in the capital market，has been too low for a long time. The fraud of listed companies，poor performance of accounting firms，release of misleading information，deceptive investment consulting，and manipulation of valuation have damaged the interests of investors，and harmed the healthy development of the capital market. To address the root cause of these violations，basic systems such as accounting，auditing and laws need to be further improved.
（III）The design of the financial market structure and system can hardly motivate financial services to serve the real economy and improve the quality of people's life.
In 2018，China's financial industry entered a new stage of comprehensive opening-up.The restrictions on the shareholding ratio of financial institutions and on financial services have been significantly eased，the interconnectivity between domestic and overseas financial markets have been strengthened，and China's stock and bond markets have been included in international indexes，laying a solid foundation for further broadening the investment and financing channels for enterprises and residents，and reducing the cost of investment and financing. However，there is an overall urgent need to further promote the two-way opening-up of China's financial industry. At present，the proportion of foreign capital in China's A-share market and bond market is only 2% and 2.9% respectively. In China，foreign-funded banks account for 1.6% of total assets of commercial banks，and foreign insurance companies have a market share of 5%，leaving much room for improvement.
The main problems in the design of the current financial market structure and system are as follows：On one hand，the barriers to entry are high，which weakens competition and strengthens the sheep-flock effect. There is a lack of differentiation between large，medium and small financial institutions，and their business development mainly relies on extensive patterns such as geographic expansion，network expansion，and credit concentration. The phenomenon of homogenization is prominent—financial institutions seek to enlarge business scale and build a more comprehensive business structure，resulting in highly similar service targets，financial products and service models，which makes it difficult to meet the diversified and personalized needs of customers. “Ownership discrimination” and the sheep-flock effect also exist to some extent. Under the catalysis of soft budget constraints，financial resources have been excessively concentrated in large enterprises，state-owned enterprises，government projects，and the real estate industry，but the support for private enterprises，small and micro-sized enterprises，“agriculture，villages and farmers”，and urban low-income populations is insufficient，causing problems such as resource mismatch and excess production capacity. There are still many shortcomings in supporting mass entrepreneurship and innovation and providing medium and long-term financial investment tools for residents. On the other hand，the imperfect exit mechanism has to a certain extent caused alienation of competitive behaviors and contributed to the rigidity of problematic financial institutions. Due to strong negative externalities of bankruptcy of financial institutions，China is cautious in building a system for the market exit of high-risk financial institutions. Although China established a deposit insurance system in 2015，and a legal framework for the disposal of high-risk financial institutions，especially banking institutions，has basically been formed，there are still problems up to now including the lack of a clear mechanism for orderly disposal，triggers for risk disposal，and division of risk disposal responsibilities in existing legislation，showing an evident fragmentation characteristic. In addition，the existing practical experience in the disposal of problematic institutions mainly relates to local financial institutions as legal persons. The disposal method generally adopts the case-by-case approach. The relatively low degree of marketization and specialization often leads to long delays in the disposal process，as well as delayed exit of problematic institutions. The alienation of competitive behavior caused by defects in the market structure is intertwined with issues such as imperfect corporate governance and insufficient risk management and control capabilities，which will further worsen the financial ecology and increase the willingness of financial institutions to take risks and the probability of systematic risk outbreaks.
II.Improving the mechanism of optimizing the financial system to promote high-quality economic development
The current imperfections in China's financial system，financial infrastructure and financial market structure have caused more financial frictions in economic operation，which include policy distortion-related financial frictions that cause differences in the financing cost of different companies，information asymmetry-related financial frictions that suppress the allocation efficiency of credit resources，and incomplete contract-related financial frictions that limit post-event implementation of financial contracts. A number of studies have shown that financial frictions are a major source of resource mismatch in developing countries. From a micro perspective，financial frictions hinder the free flow of capital elements，leading to insufficient supply of financial products，price distortions，restricted market transactions，higher financing costs of enterprises，and distorted distribution of factors between production units. From a macro perspective，financial frictions are a major reason for the gap in total-factor productivity and thus in economic development between different countries. Facing new challenges and opportunities brought about by unprecedented changes in the past century，the CPC Central Committee with Xi Jinping at its core has proposed to deepen the financial supply-side structural reform. At the core of the reform is relying on institutional innovation to reduce financial frictions，effectively reduce information asymmetry and transaction costs，give full play to the important role of finance in coordinating major economic structures，optimizing productivity distribution，and improving people's livelihood and national competitiveness，increase total-factor productivity，stimulate economic growth potential，and promote high-quality economic development.
According to the theory of new institutional economics，an efficient system will reduce uncertainty and transaction costs，and help economic entities to stabilize their expectations for the future and to avoid the opportunistic behavior of maximizing short-term benefits，thereby promoting economic growth. In the context of the financial supply-side structural reform，institutional innovation will reduce financial frictions and promote high-quality economic development through the following three channels：
First，easing financing constraint. Financing constraint refers to the fact that due to the existence of financial frictions，the external financing cost of an enterprise increases，making it impossible to invest at the optimal level. Financing constraint inhibits the investment，R&D and innovation of enterprises，affects the accumulation of reproduction factors and hinders economic growth. Otherwise，when financing constraint weakens，high-productivity enterprises will find it easier to obtain external financing，which improves the allocation of credit among enterprises as well as the efficiency of credit allocation among enterprises，and reduces the reliance of corporate investment on the overall economic environment，making corporate investment and labor employment less sensitive to shocks to economic fundamentals，and reducing macroeconomic volatility. Therefore，easing financing constraint is a central theme of high-quality economic development.
In essence，a financial product is a contract，and the structure of the contract depends on the legal system，social conventions，and technical characteristics of the subject matter of assets exchanged. The more complete the financial infrastructure and system are，the less uncertain the contract will be，and the behavior of an individual with bounded rationality in a complex environment will be greatly simplified. The continuous saving of transaction costs means an increase in economic efficiency. The improvement of the financial system structure，financial infrastructure and financial market structure through institutional innovation can effectively reduce financial frictions，ease financing constraint，and promote high-quality economic development. Firstly，according to the financial structure theory proposed by Goldsmith，as the level of economic development increases，the role of the financial market in the financial system becomes more important. Especially when the technological progress of developing countries shifts from absorption and imitation to independent innovation，financial institutions need to transition from “bank-led” to “market-led”. Optimizing the financial structure system，increasing the proportion of direct financing，changing the status quo that enterprises regard banks as their main financing channel，and increasing long-term capital supply will help improve the financing environment of enterprises and ease financing constraint. Secondly，improving the financial infrastructure will help address information asymmetry as well as adverse selection and ethical risks resulted therefrom. The cost of executing financial contracts，the corporate default risks，default losses，and the transaction costs from auditing and clearing and other regulation costs arising from corporate defaults，will be reduced，leading to a decline in the prices of financial products，and lowering the financing costs of enterprises. Meanwhile，as information asymmetry is reduced，financial institutions will effectively reduce their dependence on collateral，and will not have to allocate excessive financial resources in the secondary industry，which will help promote the development of the tertiary industry，startups and innovative enterprises. Thirdly，optimizing the structure of the financial market，reducing the barriers to entry and improving the exit mechanism while ensuring financial security，and promoting healthy competition will effectively ease financing constraint. According to industrial organization theory，in markets with lower concentration，it is difficult for large financial institutions to take advantage of their monopoly positions，information advantages，and implicit government guarantees，and set a high price for loans through conspiracy；it is also difficult for them to limit competition through various means. More adequate，healthy competition will promote information sharing required by corporate refinancing decision-making，and prompt financial institutions to lower financing requirements such as those for collateral，helping reduce credit rationing，unblock corporate financing channels，and promote capital accumulation and industrial growth.
Second，optimizing resource allocation. Recent studies based on data of Chinese micro-sized enterprises shows that by eliminating financial frictions，total-factor productivity can be increased by 12%，and the degree of dispersion in the marginal output of capital between enterprises，that is，the degree of capital mismatch，can be reduced by 50%. Moreover，the mismatch effect of financial frictions in one sector will be transmitted to other sectors through the production network，and information asymmetry will amplify the macro fluctuation effect caused by exogenous shocks such as technological changes. The spillover effect of the production network will increase the degree of dispersion in the marginal output of capital between sectors，and cause a significant decline in total-factor productivity，thereby greatly reducing the rate of economic recovery.
Perfecting the financial system structure，financial infrastructure and financial market structure through institutional innovation can effectively reduce financial frictions，address resource mismatches and promote high-quality economic development. Firstly，relevant research and practice have proven that equity financing in the financial market is more suitable for providing financial support for technological innovation. On one hand，equity investors share the potential high returns of corporate innovation according to their shareholding ratios，and investors are motivated to become shareholders and share the uncertainty of innovation with enterprises. On the other hand，innovation requires long-term and continuous investment in research and development. The long-term nature and liquidity mechanism of equity financing will enable companies to engage in technology development and product development with certain risks，and achieve conversion of technological innovation into market value. Commercial banks lack motivation to provide financial support for corporate innovation，because innovative companies often lack mortgageable assets. Even if an enterprise succeeds in research and development，commercial banks can only obtain fixed interest，which does not match the risks they bear. Therefore，it is difficult for the indirect financing model led by banks to form a risk-sharing，market-oriented financing mechanism. Moreover，the development of the financial market will enable more stable investment in education，increase the popularity of financial knowledge in a country，accelerate the accumulation of human capital，and address talent mismatches. Secondly，one of the important reasons for resource mismatch is the imperfect financial infrastructure. A complete financial infrastructure can promote the marketization of factor prices and effectively improve the efficiency of financial contracts. Therefore，in order to address resource mismatches，the construction of the financial infrastructure must be promoted by improving credit reporting mechanisms，regulatory laws and regulations，accounting and auditing systems，and enhancing law enforcement efficiency. With the continuous improvement of the financial infrastructure，the financial market can provide a diversity of more effective information for review through price signals，information disclosure，and mergers and acquisitions，and effectively pass information to investors. Due to information asymmetry and the decline in transaction costs，financial institutions，as an indirect financing channel for enterprises，will establish a more transparent and efficient loan management process while increasing the availability of credit financing，thereby forcing enterprises to improve operation and management as well as resource utilization efficiency. As a direct financing channel for enterprises，the financial market requires listed companies to disclose information. This，in essence，is to dynamically monitor enterprises，effectively reveal corporate information，and significantly reduce investors’ cost of information acquisition，and also helps to improve the efficiency of corporate innovation. Thirdly，the improvement of the financial market structure and the effective promotion of healthy competition will help transfer financial resources from inefficient sectors to efficient sectors，and then promote the upgrading of the industrial structure. Competition is an effective way to improve the efficiency of resource allocation. According to the theory of resource allocation efficiency，in a perfectly competitive market，resources are allocated among capital markets in accordance with the principle of maximum marginal efficiency. Related practice has shown that vigorously developing micro，small and medium-sized banks and optimizing the structure of the banking industry are crucial to alleviating distortion and low efficiency of financial resource allocation. With the vigorous development of direct financing，competition between participants of the capital market will drive more financial resources into “new economy” industries centered on science，knowledge，technology，data and other elements，and improve the efficiency of financial resource allocation and the total-factor productivity.
Third，addressing financial risks.The Great Depression，the financial crises in emerging market economies，and the 2008 international financial crisis all prove that when financial frictions balloon，the financial system will become unstable and the financial system will be unable to effectively provide financing channels for good investment opportunities，eventually causing the economy to slip into a severe recession. The financial accelerator theory also proposes that the greater financial frictions are，the stronger the multiplier effect of a shock will be. Even a small shock will lead to severe economic fluctuations after being transmitted by the financial market. The financial vulnerability caused by excessive debts during the economic boom，the static and dynamic multiplier effects of the credit cycle，the non-linear functional relationship between the external finance premium and financial frictions，and the self-realization of expectations through financial channels，etc.，may all amplify the shock.
Empirical research shows that perfecting the financial system structure，financial infrastructure，and financial market structure through institutional innovation can help prevent and mitigate financial risks and promote high-quality economic development. Firstly，efforts should be made to increase the proportion of direct financing，vigorously develop the financial market，and use the risk dispersion mechanism of the financial market to provide investors with a large number of diversified financial assets and derivative financial instruments. Investors can carry out risk swaps and manage portfolios based on their own risk preference. Although this will not eliminate risks as a whole，risks can be redistributed among investors with different levels of risk tolerance. Secondly，the production and trading of financial products involves far more intensive and complex contractual arrangements than other industries，and information asymmetry and ethical risks are more likely to occur in market transactions. And credit infrastructure，judicial system，information disclosure，regulatory mechanism，payment and clearing，accounting and auditing，and other market support systems can provide a foundation for promoting contract execution，boosting investors’ confidence and willingness to trade，and preventing and mitigating risks. Thirdly，related practice has shown that a healthy competitive environment is necessary to giving full play to market constraint. Optimizing the structure of the financial market and the competition mechanism，fostering a healthy competition environment，and maintaining a fair competition platform in the financial market can not only help strike a balance between financial innovation，economic efficiency and sustainable growth，but also address the ethical risk of “too big to fail” and the negative impact amplified by the connection between the systems of large financial institutions and other financial institutions，curb systematic risks and procyclical effects，and ensure financial stability and financial security.
III.Seeking dividends from institutional reforms and comprehensively deepening the financial supply-side structural reform
Deepening the financial supply-side structural reform and effectively reducing financial frictions through the benign changes of the financial system will help to ease financing constraint，improve the efficiency of financial resource allocation，prevent and mitigate financial risks，and improve the quality and efficiency of finance serving the real economy. Currently，focus should be placed on the following areas：
First，the institutional development of the financial system should be improved and focus should be gradually shifted from indirect financing to both direct and indirect financing. The urgent task is to broaden direct financing channels，increase the proportion of direct financing，build a standardized，transparent，open，dynamic and resilient capital market，and give full play to its role in market financing，price discovery and resource allocation. General Secretary Xi Jinping emphasized that，in order to deepen the financial supply-side structural reform，“focus should be placed on adjusting and optimizing the financial system structure”. Premier Li Keqiang also required that “the basic system of the capital market should be reformed and improved to promote the healthy and stable development of a multilayered capital market and to increase the proportion of direct financing，especially equity financing”. Accordingly，“a standardized，transparent，open，dynamic and resilient capital market” should be built，and the central role of the capital market in financial operations should be given full play to promote innovation and standardization of the stock market. As enterprises have different financing needs at different stages，vigorous efforts should be made to develop diversified equity financing methods including initial public offerings，secondary market financing，seed funds，angel funds，venture capital，private equity funds. Efforts should also be made to build a multilayered structure of diversified products in the bond market，and encourage the development of the junk bond market for companies with relatively low credit ratings，so as to highlight the pricing function of the bond market；and vigorously foster long-term institutional investors，and take pragmatic measures to reduce the barriers to entry for institutional investors such as pension funds，insurance funds，and various social security funds，with the view of transforming institutional investors into the dominant force in the market. An open，transparent capital market with healthy development is not only a “barometer” of the macroeconomy，but also a “booster” for industrial integration and upgrading，and an “incubator” for entrepreneurship and innovation. When cultivating such a capital market，special attention must be paid to meeting the development needs of “new economy” industries，enhancing inclusiveness for and adaptation to innovative enterprises，exploring market-based technology pricing models based on the sci-tech innovation board，channeling funds into high-quality high-tech and innovative enterprises，and promoting high-quality development of companies that rely on technological upgrades，and facilitating the transformation and upgrading of the real economy.
Second，the basic system of the financial market should be improved to lay a foundation for effectively reducing financial frictions and improving the quality and efficiency of finance serving the real economy. Firstly，an interest rate formation mechanism that is determined by market supply and demand should be built to replace the dual interest rate system and address pricing failures in an orderly manner，and enable capital prices to play a better role in optimizing the allocation of financial resources. Efforts should be made to enhance the depth and breadth of the government bond market reform to achieve a sound government bond yield curve that reflects the relationship between market supply and demand；further improve the interest rate corridor mechanism，narrow the interest rate fluctuation range，and form an open，transparent and credible interest rate corridor operation framework，with the view of conducting effective interest rate guidance in combination with daily open market operations，stabilizing market expectations，and creating a stable policy environment for the transformation and upgrading of the real economy. On this basis，the mechanism for transmission of policy interest rates to commercial bank loan interest rates，especially to micro，small and medium-sized private enterprises and to sectors serving “agriculture，villages and farmers”，should be improved. Secondly，efforts should be made to “improve the basic system of the capital market，optimize the mechanism for market entry and exit，improve the delisting system，and strengthen regulation over the entire transaction process”，steadily promote the reform of the registration system，lower requirements for corporate profits and income，improve the efficiency of listing approval，and inject vitality into the capital market with a more complete access and elimination mechanism；focus on the different positioning of different boards of the stock market，and set up a flexible mechanism for board change to attract long-term stable funds；and improve the legal system，ensure fair judicial procedures and judgment enforcement system，implement strict information disclosure system，perfect market fair valuation system，give full play to the role of the securities market as a capital intermediary，channel funds to participate in long-term investment，build a clear and professional accountability mechanism，class action system，defense testification system，and reconciliation system，etc.，promote the formation of a market order in which public power-based regulation and market self-discipline complement each other，and provide financing channels，value discovery mechanisms，risk sharing mechanisms and effective external governance mechanisms for the development of the real economy by building a stable and healthy capital market. Thirdly，the construction of the credit infrastructure and credit enhancement mechanism should be further accelerated. Efforts should be made to promote the construction of the credit infrastructure and credit enhancement mechanism by relying on modern technology such as big data，cloud computing，blockchain and artificial intelligence；steadily promote the localization of key information infrastructure for the financial industry；promote the formation of a comprehensive and professional credit reporting system；and combine the government's credit enhancement services，commercial banks’ credit services and securities companies’ capital services to effectively reduce information asymmetry as well as credit reporting and financing costs in the real economy. Fourthly，the construction of financial regulation infrastructure should be further strengthened. Efforts should be made to continue promoting the transition to a full-coverage and penetrating financial regulation system，overcome the shortcomings of the regulation system，and form a regulation system that combines institutional regulation with functional regulation，and macro prudence with micro prudence；attach equal importance to financial innovation and risk management and control，strike a balance between financial efficiency and financial stability，improve the IT popularization level and response speed of financial regulation as well as the regulatory capability that advances with the times；build a regulatory mechanism for innovative financial products on the premise of protecting consumer rights and effectively preventing risks，track closely and study the impact of fintech development on financial business models，risk characteristics and financial stability，take effective measures to deal with risk points，release pressure on the financial system，and digest systematic financial risks. In particular，it is necessary to prevent financial institutions from evading supervision through “pseudo-innovation”，reduce multilayered nesting，shorten the capital chain，eliminate capital idling，lower financing costs，and improve the quality and efficiency of financial supply. It is also required to strengthen grass-roots financial regulation forces，enhance local financial regulation responsibilities，establish a regulatory accountability system，and truly solve the problem of the low cost of violations in the financial sector，especially in the capital market.
Third，the financial market structure should be further improved，the two-way opening-up of the financial industry should be deepened on the premise of ensuring financial security，and the financial product structure and the quality of financial services should be improved through healthy competition. It is necessary to improve the structure of the financial market，promote reform with financial opening-up，further improve the marketization of the financial market，and promote the integration of the international mainstream models into China's financial system. The following measures should be taken to achieve these goals. Firstly，on the premise of macro prudence，efforts should be made to comprehensively implement the pre-establishment national treatment plus negative list management system，reduce the barriers to entry，and improve the financial institution system in which commercial finance，development finance，policy finance and cooperative finance have reasonable division of work and complement each other. At present，special attention should be paid to “increasing the number and business proportion of small and medium-sized financial institutions”，“building a multilayered，wide-coverage and differentiated banking system”，encouraging the differentiation of the functional positioning and business models of financial institutions，focusing on the development of small and medium-sized financial institutions specializing in micro financial services，and optimizing the layout of large，medium and small financial institutions. Secondly，efforts should be made to continue promoting the reform and opening-up of the financial market，and moderately reduce the barriers to entry of financial market-related business fields under the premise of controlling risks；and in the context of the development of“Shenzhen-Hong Kong Stock Connect”，“Shanghai-Hong Kong Stock Connect” and “Bond Connect”，increase the depth and breadth of the opening-up of the capital market；continue to promote the prudent opening-up of RMB capital items to provide domestic investors with a channel to share the operating outcomes of outstanding foreign companies；bring in mature and professional financial services and products from abroad，as well as high-quality foreign financial institutions，and give full play to their catfish effect，so as to force domestic financial institutions to actively change，and constantly improve the competitiveness of the financial industry while better meeting the financing needs of the real economy. Thirdly，a financial institution disposal and bankruptcy system in line with China's national conditions should be established，and the legislation-based，market-oriented exit mechanism for financial institutions should be improved. The early correction and risk management functions of deposit insurance fund management institutions should be strengthened，so that they can identify problematic financial institutions and their risk points as early as possible under the framework of “early identification and timely intervention”，and develop and launch intervention measures and procedures as soon as possible. Once a bank with high risks fails to save itself within the time limit，the takeover process will be initiated in a timely manner，in which the deposit insurance institution will take over it and adopt a variety of measures to implement professional and market-oriented disposal of the problematic bank. If it is still impossible to save the bank after risk disposal measures are adopted，the bank will file for bankruptcy and liquidation. Then the deposit insurance institution will act as the bankruptcy administrator，and after fulfilling the obligation to repay deposits in accordance with the law，will participate in bankruptcy proceedings as a creditor，allocate the property of the bank，enjoy the priority to get repayment for individual creditor's right，and thus minimize the loss of deposit insurance funds. Through the orderly adjustment of financial assets，markets and institutions，a market environment that features survival of the fittest and positive incentives should be formed to reduce inefficient and ineffective funding，and improve resource allocation efficiency. It is worth noting that expanding the two-way opening-up of the financial industry should be based on the gradual improvement of the financial infrastructure，in order to avoid the excessively fast transmission and risk contamination of fluctuations in the international financial market.
Fourth，on the basis of improving the structure of the financial market，healthy competition between financial institutions should be promoted，and the ability of financial supply to respond to financial demand should be continuously enhanced. Competition should be promoted to make financial institutions market-oriented，follow the principle of “competitive neutrality”，and provide efficient services for all types of enterprises and residents on an equal basis. With regard to the optimization of the financial product structure，the three-word policy of “Full”，“Fresh” and “Fine” should be implemented. “Full” requires to “build a comprehensive and multilayered financial support system that covers venture capital，bank credit，the bond market and stock market，enables various types of capital intermediaries to perform their respective functions”，forms a financial product line covering the entire financial life cycle，covers different，specific needs of the real economy，and lays a solid foundation for realizing the smooth circulation of the “blood” for the real economy. “Fresh” means “adapting to and developing the trends that rely more on innovation，creation and creativity”. In response to the inherent shortcomings of the current indirect financing-oriented financial product structure that relies heavily on stable cash flows，it is necessary to optimize and even innovate financial services and promote the further development and upgrading of China's strategic emerging industries by considering the characteristics of the innovative and creative industries such as low tangible asset value and varying cash flow fluctuations，and by following the principle of “focusing less on profit but more on technology and R&D” which is more conducive to financing innovative companies. “Fine” requires to “actively develop personalized，differentiated and customized financial products by adhering to the market demand-oriented approach”，based on the characteristics of different market segments，so as to satisfy the differentiated needs for financial services as the result of the development of the real economy and the improvement of people's quality of life. In particular，with respect to the vulnerable groups that are ignored under the traditional banking operation and management model，including small and micro enterprises，“agriculture，villages and farmers”，the poor and other vulnerable groups，it is necessary to attach importance to and respect the laws of the market，establish positive incentive and risk compensation mechanisms，strike a balance between the benefits，risks and costs of financial institutions，and make business sustainable. Efforts should be made to keep up with the changing customer needs，make full use of new ideas，mindsets and technologies based on the segmentation of customers’ financial service needs，actively explore new products，channels and models，and actively develop personalized，differentiated and customized financial products.
The quality of financial services should be improved and risk premiums should be reduced by promoting competition. Efforts should be made to “implement the New Development Philosophy” and “provide higher-quality and more efficient financial services for the development of the real economy”. Firstly，be targeted. “Targeted financial services focused on the construction of a modern economy's industrial system，market system，regional development system，and green development system should be provided”. Secondly，be focused. “More respect should be given to the laws of the market，and the principle of targeted support should be followed by supporting private enterprises that are in line with China's industrial development strategy，focus on the real economy，and have advanced technology，marketable products and temporary difficulties”. Based on the characteristics of the financing needs of private enterprises，personalized products should be designed using the Internet，big data and other new technologies，and be priced by considering the capital cost，operating cost，service model，guarantee mode and other factors，so as to provide more targeted and effective financial services for private enterprises，and fully stimulate the vitality and creativity of the private economy. Thirdly，financial institutions should focus on using fintech to cultivate the market research and development capability，asset identification capability，and risky asset pricing capability etc.，vigorously develop inclusive finance and green finance，reduce financial service costs，and truly improve the level，quality and efficiency of financial services.
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[1] Wang Guogang，“China's Finance in 60 Years：Brilliant Development in Storms”，Finance & Trade Economics，No.9，2009.
[2] A Brief History of Financial Development under the Leadership of the Communist Party of China，China Finance Press，2012，p.26.
[3] A Brief History of Financial Development under the Leadership of the Communist Party of China，China Finance Press，2012，p.136.
[4] A Brief History of Financial Development under the Leadership of the Communist Party of China，China Finance Press，2012，p.175.
[5] China Financial Yearbook，1993.
[6] “Decision of the State Council on Reforming the Financial System”，http://www.people.com.cn/item/flfgk/gwyfg/1993/112203199341.html.
[7] CBRC officially began to perform its duties on April 28，2003.By the end of 2003，36 banking regulation bureaus and 296 banking regulation offices had been basically established. Thus，a preliminary CBRC system was formed，laying an important organizational foundation for strengthening regulation of banking institutions and marking the entry of China's banking regulation into a new stage.
[8] On December 27，2003，the Sixth Meeting of the Standing Commission of the Tenth National People's Congress adopted the decision of the Standing Commission on amending the Law of the People's Republic of China on the People's Bank of China Law and Law of the People's Republic of China on Commercial Banks.These two laws and the Banking Regulation and Administration Law of the People's Republic of China came into effect on February 1，2004.The three laws constituted the basic legal framework for the operation of China's banking industry.
[9] As a quasi-market opening model，QFII has been adopted by many countries and regions，especially emerging market economies，as a transitional system before currencies can be fully and freely converted. It should be noted that as China's capital accounts have yet to be fully liberalized，the limited introduction of foreign capital into the securities market will help not only expand the source of funds for the securities market，but also accumulate experience for the complete liberalization of capital accounts.
[10] Village banks refer to the banking institutions established in rural areas by domestic and foreign financial institutions，domestic non-financial corporate legal entities，and domestic natural persons，with the approval of CBRC in accordance with relevant laws and regulations，which mainly provide financial services for local farmers，agriculture，and rural economic development. The Interim Provisional Regulations on the Management of Village Banks stipulates that village banks are allowed to absorb public deposits，issue short-term，medium-term and long-term loans，handle domestic settlement and bill acceptance and discounting，and engage in interbank lending and agent issuance of bank card，agent redemption，and underwriting of government bond agent payments，and insurance business. When conditions allow，village banks should set up ATM machines in rural areas.
[11] Loan companies refer to non-banking financial institutions established in rural areas by domestic commercial banks or rural cooperative banks with the approval of CBRC in accordance with relevant laws and regulations，which provide loans for county-level farmers and for agricultural and rural economic development. The Interim Provisional Regulations on the Management of Loan Companies stipulates that loan companies shall not absorb public deposits and their working capital shall be paid-in capital and borrowings from investors.
[12] Xie Ping and Zou Chuanwei，“Research on the Internet Finance Model”，Financial Research，No.12，2012.
[13] People's Bank of China，China Financial Stability Report，April 2014.
[14] Qi Shiping，Research on the Development of China's Internet Finance ：From the Perspective of Improving Financial Inclusion，Doctoral Dissertation of the Party School of the Central Committee of CPC，July 2015，pp.3-4.
[15] Tang Zhaoxia and Gao Ya，“Analysis of the Normalized Development of Internet Finance in China：Based on the Comparative Analysis of Internet Finance in China and the United States”，Southwest Finance，No.12，2015.
[16] Qi Shiping，Research on the Development of China's Internet Finance ：From the Perspective of Improving Financial Inclusion，Doctoral Dissertation of the Party School of the Central Committee of CPC，July 2015，p.6.
[17] Qi Shiping，Research on the Development of China's Internet Finance ：From the Perspective of Improving Financial Inclusion，Doctoral Dissertation of the Party School of the Central Committee of CPC，July 2015，Summary.
[18] Li Hanhong，“Internet finance is definitely not a zero-sum game”，Li Yanhong's speech at the high-end interview of the Two Sessions 2014 of China Business Radio，March 10，2014.
[19] Shan Jianbao，“Internet finance should be cooperative and inclusive”，Shan Jianbao's speech at the NetEase Annual Economist Conference，December 16，2013.
[20] Ma Weihua，“Internet finance regulation needs to consider the impact of the currency base”，Ma Weihua's speech at the Boao Forum，April 10，2014.
[21] Zhou Xiaochuan，“Internet finance should accurately understand monetary policy”，Zhou Xiaochuan's speech during his survey tour to People's Bank of China Jiaxing Central Sub-branch on April 8，2014.
[22] There are of course many complicated issues in relation with China's current financial system，such as the reform of state-owned commercial banks，the high non-performing debt ratio of financial institutions，the rationalization of the financial market structure，the construction of a multilayered capital market，and the high dependence of enterprises on bank loans. These issues will not be discussed one by one in this book.
[23] One of the main functions of the financial system is to provide a path for the transfer of economic resources at different time and between different regions and industries. Therefore，the geographical characteristic of the financial system is inherent. This geographic characteristic or the cross-regional flow of financial resources，is of great significance to economic and social development.
[24] Tian Li，Hu Gaidao and Wang Dongfang，“Research on China's Rural Financial Total Quantity”，Journal of Financial Research，2004.