Speech at the Conference on Resolving Over Capacity and Promoting Green Credit in the Banking Sector
November 4 2013
By Shang Fulin, Chairman of the CBRC
Resolving over-capacity is a short- and long-term priority in promoting industrial restructuring, to which the Central Committee of the CPC and the State Council have attached great importance. Today, with the support of Fujian Provincial Government and Committee, we are here to hold the Conference on Resolving Over Capacity and Promoting Green Credit in the Banking Sector. In this conference, we will learn the spirit of the speeches that the secretary-general has made, discuss financial policies and measures and study how to resolve over capacity to strictly prevent systematic and regional financial risks and propel transformation and upgrading of the real economy.
1. Fully understand the importance of resolving over capacity and promoting green credit
Resolving over capacity is an important task in the current economic and financial work. Over capacity has become a salient problem during our economic and social development, which has resulted from not only the changes in the global landscape of demand and supply incurred by the international financial crisis but also the lasting problems in domestic industrial development. The Central Committee has timely made the strategic plan of resolving over capacity and promoting economic transformation and upgrading based on the past lessons and learns of our economic and social development and long-term, stable and health development of the economy.
Resolving over capacity is an important mechanism for industrial upgrading. Different from past ones, this measure of resolving over capacity is to make full use of market mechanism, to promote industrial upgrading by technological progress and to enhance market competitiveness by improving product quality, standard and technology. The key is to promote technological retrofit, introduction and innovation by using market mechanism and economic leverage to realize green development. This measure is an inevitable requirement of fundamentally reducing resource consumption, carbon emission and pollution, building an environmental-friendly and resource-saving society, promoting ecological preservation and realizing the grand rejuvenation of the Chinese nation and also an important contribution to global environmental protection, human safety and health and harmonious development. Fujian Provincial Committee and Government has highly valued ecological preservation, supported the development of green credit in the banking sector, support and guide the Industrial Bank to practice the equator principles and to play a model role. Over the past years, we have made some achievements in promoting green credit. By the end of June 2013, the outstanding green loans of 21 major banking institutions has amounted to 4.9 trillion RMB and are expected to save 0.32 billion tons of standard coal, 1 billion ton of water, 0.72 billion tons of carbon dioxide, 10.139 million tons of sulfur dioxide, 4.647 million tons of COD, 2.565 million tons of nitric oxide, 0.428 million tons of ammonia nitrogen, playing a leading role in energy conservation and emission reduction.
Resolving over capacity is an important opportunity and challenge of development transformation in the banking sector. The banking sector is rooted in the real economy. Without the solid foundation and support from the real economy, the financial sector is just water without source or a tree without root. At present, the banking sector should realize the urgency and importance of resolving over capacity, insist on the doctrine that everything has two aspects and the bottom-line thinking, seek early intervention, participation and action and promote early resolving of over capacity and early upgrading of technologies, reduce risks and solve problems early and achieve a win-win situation that selects the superior and eliminates the inferior.
2. Policies and measures on earnestly resolving over capacity and promoting green credit
(1) Clarify the general requirements of resolving over capacity
The banking sector should comprehensively commit to the spirit of important speeches on resolving over capacity by Xi Jinping, the Secretary-General, and relevant documents issued by the State Council, conform the thinking and action to the decisions and plans of the Central Committee and prioritize the resolving of over capacity in the current and future development transformation and industrial restructuring. According to the general requirements of ¡°respecting objective law, implementing targeted policies based on different business, taking multi-pronged measures and addressing both the symptom and root cause of problems¡±, the banking sector should enhance the arrangement of differentiated credit support, strengthen and improve credit management and meet the policy requirements of guarantee and control. The banking sector should also further improve differentiated regulatory policies, prevent possible financial risks when supporting the resolving of over capacity, perfect the work mechanism and mobilize all relevant parties to ensure that all the policies of the Central Committee are earnestly implemented.
(2) Persist in the basic principles of resolving over capacity
Firstly, we should combine resolving of over capacity with the prevention and mitigation of our risks. We should take the initiative to accelerate the development of high-quality enterprises and advanced production capacity to leave the space for digestion, integration, transfer of production capacity and to explore market potentials in sustainable development. We should also further phase out inferior enterprises and backward production capacity, timely digest and dispose risks to prevent the risk amplification.
Second, we should combine strict control over credit incremental with optimization of the credit stock. We should strengthen credit management of new projects, guard policy boundaries, stick to strict standards of loan approval and seriously implement the discipline to curb serious over capacity and blind expansion of industries. According to the path of "digestion, transfer, integration and phasing out", we should improve the differentiated credit policy and optimize the credit structure.
Thirdly, we should combine market instruments and policy guidance. According to the principles of business sustainability, we should conduct independent assessment of loans and autonomous decision-making and give full play to the guiding, restricting and leveraging role of the financial sector in resource allocation. We should judge and study the industrial development law and market supply and demand in a scientific way, strengthen the coordination among regulatory, industrial, fiscal and credit policies and develop policy synergies.
(3) Clarify differentiated credit standards
Credit policies should be consistent with economic development strategies. In accordance with the principle of both support and control, we should develop and implement differentiated policies of controllable credit. At present, we should provide more support to the key areas and weak links of ¡°agriculture, farmers and rural areas¡±, small and micro enterprises and green credit by deepening financial services and decentralization of authority. For industries and businesses with over capacity, we should optimize the credit structure mainly by strict standards and authority recentralization. Within the industry with over capacity, we should identify the advanced and the backward, and implement differentiated policies by scientific classification of credit standards. Credit standards setting should cover profit indicators such as the profit margin, indicators of environmental protection such as carbon emission, indicators of social management such as safe production, indicators of resource consumption such as electricity, water and land use, efficiency indicators such as labor productivity as well as industry technology standards. We should improve the system of ¡°unified credit, limit management¡± based on the actual conditions of sectors and regions with over capacity and the system of ¡°centralized credit and limit management¡± and recentralize the authority of credit approval. Credit for new projects of industries with serious over capacity should be examined and approved by head offices.
(4) Major measures to resolve excess capacity
First, implement green credit standards to resolve excess capacity. The essence of green standards is to support companies in conserving energy and reducing emission and to contain the development of highly pollutant and energy-consuming industries by rationally allocating credit resources, which is consistent with the nature of resolving excess capacity. The whole process of resolving excess capacity should be based on the principles, standards and methods of green credit. We should ensure that green credit is channeled into industries that meet the requirements of technology, carbon emission and green standards. More efforts should be made to support green economy, recycling economy and low-carbon economy. More credit should be channeled into projects that aim to upgrade technology, adjust product structure and optimize industrial layout, on condition that the projects are commercially sustainable, observe national industrial policies and standards and have completed required legal procedures. Credit may continue to be channeled into indispensable ongoing projects under the principle of ¡°equivalent or decremental replacement¡± provided that the projects are in accordance with layout planning and within the carrying capacity of local environment and that required legal procedures are completed. No more credit should be allowed into newly added projects of industries with serious excess capacity. For projects that cannot complete legal procedures, no credit should be approved and financing through financial products or any other methods is prohibited and meticulous efforts should be made to call in existing loans and preserve creditors¡¯ rights.
Second, increase effective demand to absorb excess capacity. Today, many regions in China are still in the preliminary stage of urbanization and industrialization. Therefore, although certain economic sectors seem to have excess capacity in statistics, such excess capacity is merely relative, a result of underdeveloped market and untapped demand. This kind of excess capacity could be absorbed by increasing effective demand. The banking sector should leverage credit to unleash the potential of market, improve the structure of demand and enhance the upgrading of demand. Various methods such as financial lease and consumer finance should be adopted to match relatively excess capacity with potential effective demand. Credit demand should be satisfied to absorb excess capacity in such sectors as corporate procurement, household consumption, construction of new rural area and seismic reinforcement of buildings. We should encourage the application of steel structure in construction and send steel, cement, aluminum extrusions, plate glass and other building materials to the countryside. We should advance green construction projects and universalize the use of high tensile-steel reinforcement bars, high-grade cement, quality concrete, low-radiation insulating glass and other materials that are up to national standards. We should also eliminate old transport ships and expand the demand of ships in such sectors as oceaneering, fishery, administrative enforcement of law and emergency relief.
Third, encourage companies to go global in order to transfer excess capacity. Certain capacity, although in excess for China, is in shortage for some underdeveloped countries, especially for countries in preliminary stage of urbanization and industrialization, who want to share the benefits of China¡¯s development to improve the well-being of their own people. With the principle of complementarity and win-win progress in mind, we should transfer to these countries some of our excess capacity, aiming to optimize the global capacity landscape, increase the efficiency of global capacity and improve China¡¯s ability of transnational operation. To this end, we need to encourage qualified companies to undertake foreign contracted projects, enhance outbound investment and international cooperation and increase the export of domestic technologies, equipment, products, norms and services through ¡°domestic guarantee and overseas loans¡±, foreign exchange and yuan loans, trade financing and international factoring and other comprehensive financial services. We should also encourage competitive companies in such industries as iron and steel, cement, electrolytic aluminum, plate glass and ship to go global and integrate industrial resources and value chains across the world. Generally speaking, it¡¯s vital to transfer to foreign countries our excess capacity that comply with international standards and norms, that have satisfied local demand within the carrying capacity of local environment and completed legal procedures.
Fourth, encourage the M&A and reorganization of companies to optimize excess capacity. Some excess capacity results from irrational layout and some from outdated technology. To solve these problems, we need to build competitive business groups with complete industrial chains by M&A and reorganizing, upgrading technology and improving industrial layout. Specifically, under the principle of commercial sustainability, we should support M&A loans, rationalize loan interest rate and increase the length of maturity to seven years. We should encourage diluting credit risks through syndicated loan and double our support to M&A. In order to expand the source of fund for M&A, we should embrace trust plans and entrust loans. Extra efforts should be made to ensure the procedures of resigning loan contract, carry out the responsibility of credit and loans, prevent possible risks during the process of M&A and avoid unpaid debt caused by M&A.
Fifth, reduce credit for outdated capacity and protect creditors¡¯ rights in order to reach the ultimate goal of eliminating outdated capacity. Some outdated capacity wreaks havoc on ecological environment and consume a large amount of resources and affect people¡¯s health. For such outdated capacity, we should make active efforts to shut down related projects, reduce existing credit and adopt scientific measures to protect creditors¡¯ rights. Given the possibility of rising non-performing loan, we should keep close contact with financial and tax authorities, loosen the requirements for writing off non-performing loans in time and make sure that although the loan is written off, relevant record and creditors¡¯ rights still exist. We should continue to explore market-based methods of disposing non-performing loans, such as transferring bad loans in package so as to resolve excess capacity in diversified ways and prevent new risks from emerging. We should improve relevant financial services to replace outdated capacity with advanced capacity and establish a sound mechanism of eliminating the outdated and develop the advanced. Meanwhile, we need to ensure the reemployment of laid-off workers and increase credit support to service industry so as to maintain the stability of our society.
Sixth, adopt differentiated regulatory policies and coordinate regulatory policies with industrial policies and credit policies in order to create a comprehensive system of regulation, stimulation and restriction. A variety of methods should be combined to implement these measures. We should establish a sound statistical and monitoring system of credit for industries with excess capacity. Moreover, we should communicate and share information with relative departments and local governments and disclose credit risks in industries with excess capacity on a regular basis in order to increase the ability of risk prevention. Based on the current situation of resolving excess capacity, we should further study differentiated constraints of capital and provision. A post-regulation evaluation system should be set up to evaluate banks¡¯ implementation of credit policies and green credit in terms of strategic planning, management policy, internal control, organization and work efficiency, and the result should be applied to the evaluation of senior executives, business entry and supervision rating. serious punishment should take place if and credit is allowed into industries with substantial excess capacity.
3. Establish a work mechanism of resolving excess capacity and practicing green credit policy
First, recognize the significance of resolving excess capacity. Resolving excess capacity is of strategic importance for the sustainable and sound development of China¡¯s economy. The banking sector should never adopt a wait-and-see attitude, evade problems or procrastinate, nor could it refuse to provide credit to industries with severe excess capacity considering possible bad loans in short term, because we might miss the opportune time to resolve the excess capacity. We need to make meticulous and concrete efforts. Organization and leadership should be strengthened, with boards of directors in overall charge of resolving serious excess capacity and senior management and leading departments in charge of specified tasks. The whole bank should be coordinated and every level carry out its own task.
Second, improve three mechanisms. Firstly, we need to improve the mechanism of credit management by implementing differentiated risk pricing and economic capital allocation, among other measures. Secondly, we need to improve the mechanism of risk prevention by increasing our ability of identifying risks and monitoring statistics and through instant pressure test and risk response plan. For industries with severe excess capacity, we should further implement dynamic evaluation of risks and adopt five-tier classification of loans on the basis of adequate provisions for loan losses. It is also important to increase the threshold for non-performing loans and introduce regulations on ¡°fidelity exemption¡±. Finally, we should improve the mechanism of evaluation and accountability by including the work of resolving serious excess capacity and carrying out green credit into the evaluation system and link rewards and punishment with evaluation. Violation of regulations should be serious punished, either by suspending duties or by removing responsible personnel.
Third, enhance coordination. Resolving excess capacity is a systematic work which entails every aspect of the banking sector. Financial institutions should communicate actively with relevant departments. It is clearly stated by the Party Central Committee that people¡¯s governments at provincial level should take general charge of local work of resolving excess capacity, and financial institutions in banking sector should coordinate with local governments and take active part in formulating plans of resolving excess capacity. The banking sector should also communicate more actively with relevant leading department of their trades to gain information of industries with excess capacity. It¡¯s crucial to update the list of companies, including those who eliminate outdated capacity and those who violate environmental laws and regulations on the management of land and coastlines and incorporate the list into credit management. The banking sector should strengthen contact with local government and legislative authorities, and crack down companies that escape debt on the pretext of resolving excess capacity.
Dear colleagues, resolving excess capacity is a complex and arduous task. We should live up to our duties and accomplish our mission. It¡¯s time for us to speed up economic restructuring and upgrading, and make greater contribution to the China dream of national revival.
Finally, I wish a full success of this conference.
Copyright: China Banking Regulatory Commission