Since 2014, General Secretary Xi Jinping has put forward the requirement of “adapting to the New Normal” on different occasions, in which he points out that China is still in the period of important strategic opportunities, and we should build up our confidence, adapt to the “New Normal” starting from the stage-based characteristics of China’s current economic development, and keep a normal attitude in terms of strategy.
“Finance is the core of modern economy and the New Normal of economy will unavoidably produce the New Normal of finance”, said President Li Renjie of IB in the interview with the reporter of 21st Century Business Herald.
In his opinion, the current macroeconomic environment of China is generally under the “superimposition of such three periods”, namely the transition period in respect of the growth rate, the throes period for structural adjustment, and the digestion period for early-stage stimulus policies. Behind it the main cause lies in the deep-rooted influence of the old economic growth model and there are still many to-and-fro movements between the New Normal and old normal of economy.
New Normal of Finance
21st Century Business Herald: What are the main signs of the “New Normal” of finance that you have mentioned?
Li Renjie: In terms of specific representations, the New Normal of China’s finance can be seen mainly in the following three areas:
First, the growth speed of the finance industry returns to the normal track in response to the slowdown of economic growth. Considering the entire finance industry, if the economic growth speed remains at 7%~8%, but the finance industry keeps a growth speed of 20%~30%, this is obviously unreasonable, nor sustainable. The reason is that, under such situation, many financial activities are in fact breaking away with the reality but only entertaining ourselves. In like manner, individual financial institutions should have a more practical and reasonable expectation to its future development speed.
Second, the structure and ecology of financial will change. The following three phenomena have existed in China’s economy and finance all the while: firstly, the phenomenon of “sufficient supply of funds but lack of capital”, which results in that the liability ratios of enterprises and local governments are high; secondly, the phenomenon of high indirect financing but low direct financing”, which results in that the risks of national economy are mainly concentrated in the banking system; thirdly, “over-abundance in banking deposit and loan businesses, but insufficiency in other businesses”, which means that banks only know doing deposit and loan businesses, but don’t engage in other financial businesses adequately.
In the future, such situation will be changed with the advancement made in improving economic structure and market-oriented reform. On one hand, a multi-level financial market system will be further improved, and new forms of financial services like internet finance will come forth in an increasing speed. On the other hand, due to the further market-oriented price mechanism for finance industry, the fluctuation in interest rate and exchange rate will become a “New Normal” for finance.
Third, the regulatory environment for finance becomes increasingly strict. After the global financial crisis in 2008, the Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) both actively pushed forward the reform of international financial regulation, putting forward a range of new rules for financial regulation. In the meantime, the financial regulation at home will also change based on actual situation: firstly, to maintain the financial stability, the requirement for banking capital will become stricter and the requirement for liquidity will be further elevated; secondly, the implementation of “ring fencing principle” requires separating banking from other different types of financial businesses and risks; thirdly, to intensify prudent regulation, on one hand, requires the development speed of banks to adapt to economic development, and on the other hand, requires financial activities to be more transparent and standardized.
21st Century Business Herald: What challenges and pressures do these “New Normal” situations of finance bring to the banking industry?
Li Renjie: I believe that the banking operation will face two major challenges: The first one is the constant exposure of non-performing assets and the increasing pressure of risk control.
The second one is that it is pressing to transform the business models and the conventional profit rooms of banks are under compression at both ends. On one hand, all the profits of banks are under obstruction, and various business costs including capital cost, fund cost and compliance cost keep growing; on the other hand, the welling-up of new financial service models and organizations pose challenges to the business areas of conventional banks.
Transformation Sample of IB
21st Century Business Herald: Under the above new challenges and pressures, what are directions and emphases for the future transformation of the banking industry?
Li Renjie: From the perspective of the common features in business development of mature banks around the world, it has become a common trend for global mainstream banks to lay great stress on and focus on the development of light-asset businesses. In general, the main direction for the business transformation of banks should be “light asset and high efficiency".
Specifically, the transformation should be conducted in five aspects: The first one is transformation from the role of credit and fund agency to that of information and capital agency. The second one is transformation from simple participation in credit market to active participation in the entire financial market covering credit market, monetary market, capital market, futures market and foreign exchange market. The third one is the transformation of business structure from heavy asset and capital to light asset and light capital. The fourth one is the transformation from the model of holding assets to the maturity to that of focusing on trading and management of assets, such as developing agency business management and custody businesses actively. The fifth one is the transformation from “financing” to “knowledge leveraging”, and banks should try every possible way to develop integrated financial services, offer financial solutions in complete sets and strive for becoming a “shadow CFO” of customers.
21st Century Business Herald: As IB has always stressed on capital-return ratio, could you talk about the recent transformation path of the bank?
Li Renjie: In the perspective of IB’s practice, the transformation is carried out on the path to strive for building a professional service system of “one body with two wings” in the light of the “customer-focused” concept and principle. Specifically, one body refers to the conventional banking businesses; one wing refers to the wholesale banking businesses, similar to corporate and investment banking businesses of large international banks, and the other wing refers to wealth management, private banking and the assets management businesses driven by them.
To be specific, customers of the conventional banking businesses are mainly medium-, small- and mini-sized corporate and retail customers. There are a large number of such customers, and their financial needs are comparatively simple. They will be the main group requiring conventional deposit and loan businesses. As they have a weak bargaining power and meet the direction of policy support, banks should take initiative to sink service focus and offer such customers with appropriate financial services actively, so as to gain benefits of dispersing risks, keeping proper interest spread and low risk weight.
Customers of wholesale banking businesses are manly large corporations, financial institutions, public service suppliers and social organizations like foundations. They are outstanding ones among customers, and they have many financial service needs but high bargaining power. Banks must transform themselves from credit agencies to information and capital agencies, intensify customer refining and industrial research, and offer a package of all-course, customized and integrated financial solutions with high values in the principle of different policies in different situations, including debt financing, equity financing, agency trading, custody and marketmaking services for customers.
Customers of wealth management, private banking and the assets management businesses driven by them are of a broad variety, including both individuals and institutions. Banks should put emphasis on improvement in the following aspect: transform business model from being “financing-driven” to “consulting-driven”, get rid of the “shadow” position of conventional banks, and really return to essence of “agency” and “custody”.
Advice on “Replacement of Business Tax with Value-added Tax” of Banks
21st Century Business Herald: What do you expect of the financial regulation under the “New Normal” of finance?
Li Renjie: At present, two trends appearing in the finance industry are worth attention. On one hand, group-based and integrated operation of the finance industry will be further pushed forward. All financial institutions will keep exploring integrated operation, so various crossed, inter-industry, and inter-market financial innovation will increase continuously. On the other hand, a large number of non-financial institutions begin to set foot in the area of finance, and cross-border operation has become a prevailing common practice.
Under such a background, if we stick to the model of institution-based regulation, not only will it be easy to lead to phenomena such as repeated regulation over financial institutions, inconsistent regulation and regulatory arbitrage, but also it will form regulatory vacuum in fact, which may have big risk troubles hidden, because no regulatory administration is specified for non-financial institutions setting foot in the area of finance, and it is not easy to specify a specific one.
Thus, on one hand, we should following the orientation to intensify functional regulation and create a fair environment, and enforce unified regulatory rules over various institutions engaging in the same kind of financial businesses according to the essential attributes and functions of various financial products and financial businesses. In addition, we should give our attention to abandoning the concepts of regulation over banks under the old normal, and in particular, we shouldn’t restrict the understanding of banking businesses to the areas of deposit and loan under the “New Normal”.
21st Century Business Herald: In the following period, a big movement for the finance industry is to “replace business tax with value-added tax”. What advice do you have for this?
Li Renjie: In my opinion, based on the “replacement of business tax with value-added tax” in the banking industry, I suggest giving appropriate tax support to market-oriented and trade-based businesses meeting the requirements of banking transformation and development in terms of specific taxation design.
Considering the situation at home, with the deepened integrated business operation of banks, there will be an increasing number of internal institutions of banks converted into independent market players. In this way, the transactions within a bank will become market-based ones, and thus, the operating incomes of banking groups will increase. If, in implementing the “replacement of business tax with value-added tax”, we merely replace the business tax originally based on the operating incomes of banks into the so-called value-added tax, it is likely to raise the overall level of tax burden of banking groups.
In the perspective of international general practice, the value-added tax for financial services (including banking and insurance) are generally derated. The main reason lies in that, for the complicated intermediate businesses consisting of a large number of financial activities, it is hard to assess and determine the tax base transaction by transaction. (Reporter: Qiao Jiawei)