(Yicai Global) Nov. 24 -- China's state-run People's Daily newspaper published a 5,000-character commentary by Zhou Xiaochuan, governor of the country's central bank, the People's Bank of China (PBOC), titled 'Holding Fast to the Bottom Line of Financial Risk Prevention' on Wednesday. The article gives a detailed outline of key issues in the financial sector today, causes for the problems and financial development measures for the future. Several Chinese experts shared their interpretations of the article in an interview with China News Service. 

In fact, the commentary was first released on the evening of Nov. 4 on the central bank's website, and was published on People's Daily earlier this week, an indication of the weight that the article carries.  

Yin Zhongli, researcher at the Institute of Finance and Banking, Chinese Academy of Social Sciences

Zhou called for the institutional separation of the industrial sector from the financial market. This is because that many industrial investors are deeply involved in financial investment activities, and they are able to pull strings related to financial capital as shareholders, creating an entanglement of different types of risks in the economy. Therefore, it is necessary to keep them apart.

Financial regulators should establish entry criteria for investors of financial institutions, and keep credit risk in check, imposing clear restrictions on the use of financial capital and shareholders of financial institutions.

It means that the regulators will tighten up their control on the market going forward. The focus has been placed on encouraging financial innovation during the past five years, and it will shift toward effective market regulation over the next five years.   

Sun Lijian, director of the Financial Research Center at Fudan University

Governor Zhou talked about challenges facing the development of the financial market development, and they merit particular attention.

The first challenge is hidden debts. Two major US rating agencies have previously downgraded credit ratings on China's sovereign debts. Their decisions sparked controversies, but the national finance working conference soon accepted their reasons for lowering the ratings -- hidden debts.

Unlike Western nations, the Chinese government borrowed money to build railways, roads and environmental protection facilities, which are closely connected with people's livelihoods. However, most of the money was borrowed from banks, and it will take the companies many years to repay the loans with profits, so the government must foot the bill first, resulting in a continuous buildup of debts and money supply and credit expansion borne out of the need to ease debt default risks.

The second challenge is shadow banking. The public has become increasingly aware of the gradual impairment of their purchasing power resulting from credit easing necessitated by the corporate sector's growing reliance on bank lending. As a result, more people have spent their savings on wealth management products, and the resulting outflow of funds from banks has led to some major effects on the real economy, which are manifested by two phenomena -- the cost of bank financing has increased against a decline in the duration of bank loans, making it increasingly difficult to meet industrial businesses' demand for low-cost long-term financing; wealth management products put serious constraints on consumer spending growth and on corporate profitability, prompting businesses to switch from long-term industrial investment toward short-term financial projects that offer higher returns on investment. Banks have also developed a bias toward high-risk and high-return off-balance-sheet businesses in line with changes in clients' preferences, hence the governor's second concern, shadow banking.

The third challenge is money laundering. Government-led investment projects can easily give rise to abuse of power and other forms of corruptions, which in turn inevitably lead to money laundering activities. This is why financial innovations have become a hotbed for money laundering.

So, I think that all of these three issues pointed out by the governor are closely connected, and the way to solve them is to transform the existing economic growth model through the supply-side reform.

Wen Bin, chief analyst at China Minsheng Bank

In the article, Zhou mentioned that "In terms of macroeconomic regulation, there has been interference with the effective control on the 'master valve' of money supplies", and that "It is hard to find a window for correcting [past policies] in macroeconomic regulation". These two points are very important.

Resulting from a tendency among industry associations and local governments to overemphasize the importance of industry and economic scale and growth speed, excess credit expansion in recent years has resulted in a buildup of debts for local governments. Furthermore, regulators have also prioritized market development and innovation over risk prevention and management. A combination of factors has contributed to the boom of the financial market and accumulation of systemic risks. 

Therefore, efforts need to be made to create a regulation framework based on two 'pillars' -- a sound monetary policy and a prudent macroeconomic policy, allowing the central bank to play a leading role in macroprudential regulation to safeguard the steady and healthy development of the financial market. 

Wu Qing, chief economist at China Orient Asset Management

The central bank has different priorities at different development stages. Zhou published the commentary at this particular time, indicating that risk prevention will remain the bank's top priority for a certain period to come.

The purpose of institutionally separating the industrial sector from the financial market is to avoid risk spillovers. On the one hand, well-defined restrictions will be imposed on financial institutions' shareholders and originators, and their shareholdings and voting rights will be held in check. On the other hand, any related-party transactions between industrial enterprises and financial institutions will be subject to scrutiny by regulators.

New measures will be introduced to ratchet up financial regulation further. In the meanwhile, financial innovations will not stop, and the regulators will still encourage financial institutions to optimize their services in terms of facilitating real economic growth.

Zhou Jingtong, division head and at Bank of China's Institute of International Finance

The article mentioned, "Some internet companies that claim to help people access finance services are actually Ponzi schemes; frequent illegitimate online and offline fundraising activities and poorly-regulated exchange markets can easily lead to regional mass incidents. A small number of financial titans have bribed and colluded with regulatory officials who hold approval authority. These officials are too close to the firms and people they are supposed to oversee, financial investor and consumer protection is still inadequate." The harsh criticisms point out some of the most serious issues exist in the financial sector. In particular, the explicit revelation of collusion between 'financial titans' and regulators means that financial regulators are acutely aware of the risks and have determined to eliminate them.