Written by Stanley Zhou, Stella Wang, Anne-Marie Neagle and Andrew Fei, Finance & Securities Group, King & Wood Mallesons

On 12 March 2021, China released its much-anticipated economic and social development blueprint for the next five years and beyond – the ‘Outline of the 14th Five-Year Plan (2021-25) for National Economic and Social Development and Long-term Objectives Through 2035’ (14th Five-Year Plan).

This article discusses the key takeaways from the 14th Five-Year Plan for the financial services sector.

I. Introduction

The 14th Five-Year Plan reiterates China’s commitment to:

  • achieving high-quality growth and development;
  • implementing on-going economic and social reforms;
  • opening up its economy and attracting foreign trade and investment;
  • enhancing its business environment and legal system;
  • encouraging innovation and digitalisation; and
  • improving living standards and the environment.

As China’s key policy blueprint for the next five years and beyond, the 14th Five-Year Plan (consisting of 65 chapters) touches on almost every aspect of Chinese economy and society, and is a must-read for anyone who wishes to have a better understanding of China’s policy direction.  Please refer to KWM’s earlier article for a more thematic introduction to the 14th Five-Year Plan.

The key takeaways for the financial services sector set out below would be of particular interest to foreign financial institutions and market participants.

II. Key takeaways for the financial services sector

Supporting the real economy

Chinese policymakers consistently emphasize the need for China’s financial sector to serve the real economy instead of engaging in purely speculative activities that provide limited real economic and social benefits.  The 14th Five-Year Plan envisions a Chinese economy that is increasingly focused on high-quality growth, innovation, digital, domestic consumption, improved living standards and the environment.  Therefore, in the short-to-medium term, we can expect China’s financial institutions, markets, regulators and policies to continue to support each of these themes.

Digital currency and digital economy

The 14th Five-Year Plan states that China will promote the research and development of its own digital currency.  For the past few years, China’s central bank has been developing and pilot testing a government-issued digital RMB known as DCEP (which is an abbreviate for Digital Currency Electronic Payment).  While the widespread introduction of a central bank digital currency in the world’s most populous nation will not take place overnight, the eventual emergence of a digital RMB could bring significant benefits for China’s rapidly digitising economy and facilitate cross-border RMB payments and the currency’s internationalisation.

Besides digital RMB, China will also promote financial innovation, provided that it is pursued in an orderly manner and subject to prudential supervision so as to prevent systemic risks.  Likewise, China will further develop its fintech capabilities and accelerate the digital transformation of its financial institutions.

Supporting scientific and technological innovation

As part of facilitating China’s push for scientific and technological innovation, the 14th Five-Year Plan encourages financial institutions to develop financial products such as intellectual property-based financing solutions as well as lending and insurance products tailored for companies that pursue scientific and technological research, development and commercialisation.  Securitisation and other structured finance techniques may play an important role in developing these innovation-supporting financial products.

China’s capital markets

According to the 14th Five-Year Plan, China will develop its multi-faceted capital markets, enhance the role played by institutional investors (retail investors are highly active in certain segments of China’s financial markets), and increase the proportion of direct financing, especially equity financing.

In terms of equity capital markets, the 14th Five-Year Plan states that China will fully implement a registration system for initial public offerings (IPOs), improve corporate governance and strengthen delisting mechanisms – all measures that are designed to improve the quality of Chinese listed companies.  China will also encourage the development of angel and venture capital investments.

As for debt capital markets, China stated that it will steadily expand the size of its bond market (currently the second largest in the world), broaden the range of fixed income products, and improve mechanisms for dealing with bond defaults which have been on the rise.

Green finance

Improving the environment features prominently in the 14th Five-Year Plan.  It is therefore not surprising that the plan states that China will “greatly develop” its green finance capabilities.  Some analysts have estimated that China will require nearly USD 1 trillion in green financing per year in order to meet its carbon neutrality and other environmental objectives.  The ‘greening’ of China’s financial sector therefore presents significant opportunities in the near-to-medium term.

Further opening-up

According to the 14th Five-Year Plan, China will further open up its banking, securities, insurance, funds, futures and other financial sectors, deepen the connectivity between Chinese and foreign financial markets, and improve the existing regime for qualified foreign investors.  The 14th Five-Year Plan underscores China’s commitment to the Guangdong-Hong Kong-Macau Greater Bay Area (GBA), including by expanding interconnections between the financial markets in Mainland China, the Hong Kong Special Administrative Region and the Macau Hong Kong Special Administrative Region.  Recent examples of successful financial market interconnections include Stock Connect, Bond Connect and Wealth Management Connect.  Please refer to our GBA Hub for other articles on the GBA.

Strengthening financial regulation and supervision

The 14th Five-Year Plan states that China will enhance its financial regulatory and supervisory framework, including by improving the corporate governance of financial institutions and strengthening the regulation of related party transactions.  In recent years, corporate governance and intragroup exposure issues have emerged in a few small and medium-sized financial institutions.

China will also strengthen the supervision of systemically important financial institutions (four Chinese commercial banks are designated by the Financial Stability Board as global systemically important banks) and financial holding companies, promote the identification and disposal of non-performing assets, address shadow banking risks, and improve the supervision of internet finance.

The 14th Five-Year Plan’s emphasis on strengthening financial regulation and supervision indicates that ensuring financial stability will continue to be Chinese financial regulators’ paramount policy consideration.  Accordingly, we can expect China to continue to adopt a gradual and incremental approach to reforming, opening up and strengthening its financial sector and to emphasize strict compliance with regulatory requirements in order to prevent systemic risks.

III. Conclusion

The policy objectives and measures outlined in the 14th Five-Year Plan will deliver important reforms and, with them, potential opportunities, to local and international investors and financial institutions operating in China and around the world.

The 14th Five-Year Plan shows that high-quality growth, innovation and digital will be at the forefront of China’s economic and social development agenda over the medium term, and that the financial services sector (including both domestic and foreign financial institutions and investors) will play an important role in these developments.

King & Wood Mallesons has decades of experience in successfully helping foreign investors establish and expand their operations in China, enter into joint ventures with Chinese financial institutions, invest in the Chinese financial services sector and comply with applicable Chinese laws and financial regulations.  Should you wish to discuss what the 14th Five-Year Plan mean for you or your business, please contact a member of our cross-border team.

In the meantime, we will continue to keep you updated on important Chinese financial regulatory developments through our regular client alerts and in-depth analysis.