The Objective, Instruments And Mode Of Differentiated Financial Regulation In China

In 2009, China implemented the moderately loose monetary policy, that has made great achievements in support of expanding domestic demand and maintain growth, but also accompanied by a series of problems including rapid asset price rise and excessive credit concentration, namely the monetary policy has had differentiated effect in various departments. Although a large number of empirical studies show that there is monetary policy's differentiated effects in major economies, but the differentiated effects of monetary policy in China not only affects the effectiveness of monetary policy, but also exacerbates economic structural imbalance. In this article, it is defined as a non-equilibrium effect of monetary policy. Based on this, in 2010 the moderately loose monetary policy should be continued to carry out by improving the flexibility and relevance according to new situations. This is the background and starting point of the study about the differentiated financial regulation, in another word, the target of differentiated financial regulation is to eliminate the non-equilibrium effects of monetary policy. Because of the non-equilibrium effects of monetary policy have various performances at different levels, such as asset bubble, the weak sector's financing dilemma, so there are many specific targets of the differentiated financial regulation.Non-equilibrium effects of monetary policy arise in monetary policy's transmission process. In the planned economy era, there was no independent monetary policy, so financial resources are allocated to various departments strictly according to national plans. This government-led allocation of resources couldn't play the role of market incentives and screening, so it lacked micro-efficiency. With the establishment of the central bank system, monetary policy gradually independed from the national credit plans, and not directly intervened the allocation of the credit resources in micro-level. Although this allocation of financial resources to ensure the micro-efficiency, but in such a transition economy, because of industrial sectors' structure rigidity and financial market failures in China, allocation of resources entirely depend on market often leads to macro-imbalance. From the perspective of industrial sectors' structural rigidity, due to sector monopoly, environmental differences and other factors, there are the trend of unbalanced development that those strong sectors have a relatively large financial advantage, but those weak sectors are vice versa. From the perspective of financial market failure, due to irrational expectations and information asymmetries, allocating resources through financial market tends to favor those strong sectors, in particularly sectors which have high quality collateral (e.g. real estate),but tends to hold discriminatory attitudes to those weak sectors (such as SMEs which lack collateral goods). This is the primary cause of monetary policy's non-equilibrium effects.Because of credit channel is the main means of transmission of monetary policy, credit structure's adjustment will be the intermediate goal of the differentiated financial regulation. Monetary transmission channel of monetary policy is not clear, because the interest rates liberalization reform in China has not yet finalized, and Tobin's Q and wealth effects in capital market is not significant. In China's financial markets, commercial bank has an absolute position, especially SMEs mainly rely on commercial bank financing, so the credit market plays a decisive role in monetary policy transmission. In contrast, monetary policy's non-equilibrium effects mainly due to the imbalance of the credit structure. Therefore, the differentiated financial regulation should not only regulate the liquidity's distribution within the financial system, but also adjust the allocation of credit resources in the real economy, that is, the intermediate goal of the differentiated financial regulation should be the credit structure (implementing "guarantee some while reducing others" adjustment to the credit structure).Commercial bank's credit rationing is the micro-foundation of the credit structure. Because of the information asymmetry in financial markets, commercial banks face adverse selection and moral hazard problems. While raising interest rates would increase the risk of credit assets, as well as increasing interest income, there is an optimal level of interest rates for commercial banks, which can achieve a balance between interest income and asset risk. This led to difficult adjustment of supply and demand by credit market interest rate movements and fixed prices of capital. At this time, only the amount of money can be allocated. As creditors, commercial banks pay more attention to assets security rather than high income and value the borrower's credit worthiness, collateral, corporate net worth and other factors. Energy, raw materials, infrastructure, real estate industries and the government financing platform which has a high credibility become the object of commercial banks in favor, while poor agriculture and SMEs which are lack of transparency and eligible hostage are faced with adverse situations. Moreover, the structural rigidity of China's industrial sector makes quite different profit level between the various sectors in a long-term, which reinforced the specific industry's advantages in financing. Fierce competition of credit market and the multi-level agency of large financial institutions also increased credit rationing on different industry division. This also indicates that although the current configuration of commercial bank credit has led to an imbalance in the macro level, it accords to their own interest objectives.Traditional monetary policy tools face more challenges in adjusting credit structure. Rediscount (refinancing), the statutory reserve and the open market operations are adept to regulate the liquidity of financial markets, while having difficult in affecting financial institutions'credit decisions and adjusting credit structure. Although China has implemented differentiated reserve, e.g. issuing orientation bills to specific financial institutions, the differentiation of which is targeted at financial institutions, it is still difficult to effectively adjust the credit structure. Window guidance and credit policy are tools to adjust credit structure, but they are lack of incentives and the binding effect for commercial banks; credit scheme, which is lack of market selection mechanisms and incentives, though with strong enforcement power, often loses efficiency of resource allocation.We need innovate research ideas to analyze differentiated financial regulation which is aimed at adjusting credit structure. These ideas include the innovation on regulation objects, measure s and instruments.Considering regulation objects, we should implement differentiated regulation in allusion to various industries. Since existing differentiated instruments are implemented by financial institutions which can only adjust surplus and deficiency of liquidity, the effect to credit structure adjustment is not significant. In addition, some other researches regard various areas as differentiated regulation objects. This thesis finds that industry characters are the direct causes of forming credit-collocating-unbalance on the level of areas and enterprises, so we suggest implement differentiated regulation on the object of industries.Considering regulation measures, we should adjust not only credit supply structure, but also demand structure. Traditional measures only pay attention to commercial banks and credit supply aspects, for example, by all kinds of ways restraining the credit supply to superiority departments and increasing the credit supply to weak departments. However, since superiority departments have strong financial ability, the effect of restraining credit supply is not significant. So we should focus on restraining the credit demand of superiority departments.Considering regulation instruments, we should implement supervise instruments and innovate a series of system instruments on the basis of making full use of existing monetary instruments. Firstly, in order to guide commercial banks behavior, central bank can relax or contract liquidity by differentiated reserve requirements, orientation bills, rediscount, open market operations etc. Considering we have liberalized the upper limit of loan interest, this thesis suggests that we should apply differentiated lower limit of loan interest to different departments, for example, constituting a lowest loan interest rate for specific departments to inhibit strong credit demand. In addition, some other monetary instruments are differentiated themselves, such as e instruments to regulate financing in real estate market and stock market which are main to differentiate the minimum down payment rate and loan term. Secondly, central bank can relax or contract capital constraints by using supervise instruments. For example, implying differentiated capital ratio to bank loans from different industries, or adopting different risk coefficient while calculating the weighted risk assets of loans from different industries. Thirdly, central bank can innovate system instruments and build some professional financial institutions which have comparative advantages in specific industry financing.Developed economies have also implemented financial policy to adjust the allocation of credit resources. "Community Reinvestment Act" provides that funds of state commercial banks should first meet the demand of local economic development, and also set aside special funds for the black and poor residents in the location of the bank to assure their economic activities needs. In response to rising real estate prices, Singapore have also taken similar measures and set the ceiling ratio of real estate loans to bank credit. To encourage the development of strategic industries, Japan and South Korea have used rediscount policy to support specific sectors by rediscounting specific bills. Bank of Japan also used window guidance and credit policy to intervene the allocation of credit frequently. In order to ensure resource allocation efficiency at the micro level, this paper also studies the principles, effect of the border and control mode of differentiated financial regulation. First of all, differentiated financial regulation should follow the principal characterized as "unified planning, comparative advantage, incentive compatibility, select the right match". Secondly, the control boundary of differentiated financial regulation is limited to the industry level, in order to realize the object of "structural control of credit scale" without interfering with banks' credit decisions on specific enterprise-level. Thirdly, differentiated financial regulation should be completed though market-oriented approach, by influencing the benefits of financial institutions and the real economy and the function of restricted variables without affecting the legal status and decision-making rights of economic agents, thus ensuring the efficiency of resource allocation in the micro.