“The thirteenth Five-Year Plan”and China’s Financial stability issues

Ⅰ.Introduction

Financial stability is an inherent requirement of a countrys high-quality economic development. Although financial systems differ between countries， all governments want their respective financial systems to be ready to deal with economic difficulties and risks. Risk in this context can be divided into corporate risk and market risk. In the event of a financial crisis， the whole financial market may be threatened. Through strict supervision of the financial system and the prediction of possible future risks， financial stability can be better controlled.

The rest of the paper is organized as follows. Section 2 analyzes the causes of the current economic environment. Section 3 then examines the effects of low interest rate policies in the banking and financial systems. Section 4 introduces the advantages and disadvantages brought by big technology and fintech companies to global economic development. Section 5 concludes.

Ⅱ. Background

Ten years on from the global financial crisis， its effects persist. Falling wages and rising unemployment in the wake of the crisis led to a loss of confidence in financial institutions. The 2008 crisis had an unprecedented impact on the world economy， affecting a wide range of developed economies， such as Japan and the European Union. To draw lessons from this event， scholars have summarized the leading causes of the financial crisis. The deregulation of financial markets led to the excessive development of many innovative financial products and excessive speculation in financial markets， leading to the emergence of financial bubbles. Moreover， the U.S. monetary policy of low interest rates since 1980s ostensibly created financial bubbles while promoting an economic boom （Taylor， 2007; Acharya and Richardson， 2010）

After the 2008 financial crisis， global central banks cut interest rates to stimulate consumption and， thereby， ease the impact of the deepening economic crisis. （Ivashina and Scharfstein， 2010）. Led by the U.S. Federal Reserve， the central banks of various countries have adopted loose monetary policies. They aim to alleviate the vicious impact of the crisis on the world economy and peoples lives. Expansionary fiscal policy is precisely the opposite of contractionary monetary policy it aims to stimulate economic recovery by lowering the interest rate and increasing monetary quantity.

The financial crisis brought many valuable lessons. Among the most important is the need to preserve financial stability. Cihák （2006） summarizes three reasons why financial stability has become the focus of many countries. First， the frequency of financial crises has been increasing in recent years： prominent examples include the Asian economic crisis in 1997， and the global financial crisis in 2008. The high cost of financial crises is also noteworthy： besides economic loss， there is also psychological upheaval and people lose their sense of security. For all of these issues， the recovery time is long. The second reason is that the number of financial transactions continues to grow. Finally， the emergence of business innovations confronts the financial system with new opportunities and challenges.

There is no uniform definition of financial stability among scholars， and different understandings also feature different concepts. Schinasi （2004） argues that financial stability is a combination of many financial elements， which can be continuously changed over time to stimulate the economic process， manage risks， and minimize the adverse effects of shocks. Cihák （2006） defines financial stability as the “smooth functioning of the components of the financial system （institutions， markets， payments， settlement and clearing systems）.”

Ⅲ. Effects of low -interest rates on banksperformance and financial stability

The policy of lowering lending standards and interest rates has both short-term and long-term effects on banks and financial stability. In the short-term， low interest rates may encourage banks and other financial intermediaries to take significant risks. The net interest rate curve indicates the risk of the banking industry. A high net interest yield curve usually results from short-term interest rates， indicating that banks are taking significant risks （Maddaloni and Peydro， 2011）. With fewer new loans issued than the number of outstanding loans， the pressure of banks on short-term investments is relieved.

Banks relax lending standards to increase bank liquidity. Keeping interest rates low and liquidity high for a long time may create incentives for banks to lend to riskier debt applicants. This is one way for banks to mitigate their weakness to increase short-term profitability （Allen and Gale， 2007; Diamond and Rajan， 2009）. The impact of easing lending standards will be felt when interest rates climb again. By analyzing the bank lending situation in the eurozone and the United States， Bonfim and Soares （2018） conclude that setting a low short-term interest rate harms lending standards. An essential driver of the 2008 financial crisis was the long period with a low monetary interest rate. The other two indirect drivers were high securities and loose regulatory standards （Maddaloni and Peydro， 2011）. Studies of the past financial crisis have found that the low interest rate led to a credit service boom and real estate bubble： the root causes of the financial crisis and resulting economic crisis （Taylor， 2007; Calomiris， 2008）. Therefore， keeping interest rates low for a long period will likely increase the risk of another financial crisis， thus negatively impacting on financial stability.

Low interest rates affect the profitability and performance of the banking industry. More broadly， the economy and development of a country directly affect banks profitability （Wainaina， 2013）. When systemic risk events such as economic crisis occur， banks are forced to give up part of their income， causing their performance to decline. As commercial enterprises， banks need to make money to pay employees salaries， finance operations， and fund investments. The market interest rate is positively related to the net interest margin. A change in the interest rate has a strong influence on the net interest margin： when interest rates are lowered， the net interest margin will also decrease （Borio， Gambacorta， and Hofmann， 2015）. Banks obtain capital by storing customers cash and capture value by cross-selling mortgages and other products （Berger， Hancock， and Humphrey， 1993）. When the interest rate is reduced， the banks profit margin decreases， and customers can only gain a small amount of income from savings. Therefore， customers tend to spend more， and such massive spending means a loss of savings customers for banks， thus reducing their performance.

The decline in banks profitability negatively impacts on their stakeholders， including homeowners， investors， creditors， governments， and regulatory authorities （Panayiotis， Athanasoglou， Delis， and Staikouras， 2006）. Long-term low interest rates lead to excessive borrowing by investors to increase investment returns. Critics argue that the factors affecting profitability are complex and do not depend solely on changes in interest rates. Different regional environments bring various determinants of bank profitability （Yuqi， 2008）. When interest rates fall， savings become less profitable. Although this hurts banks deposit performance， it brings advantages to the stock market with an influx in money from investors; prices rise when demand for stocks shows an upward trend.

The insurance and pensions industries are negatively affected. Lower interest rates cut the number of participants and funders in， among others， pensions and life insurance firms. These donors tend to prefer investment insurance to fixed income savings. Lower interest rates also reduce the attractiveness of risk-free assets and increase the attractiveness of risky assets， providing opportunities for financial intermediaries to pursue interests （Rajan， 2005）. These intermediaries include insurance companies， pension funds， and investment trusts. The regulatory system for these intermediary financial companies is typically weak.

Ⅳ. The competitive threat of BigTech and Fintech companies to banking intermediaries and the implications for financial stability

The rapid development of Internet technology continues to bring many innovations and new concepts， such as artificial intelligence， big data， and the Internet of Things. The financial industry is also affected by the Internet， and financial technology has become a general development trend. The development of science and technology has improved peoples living standards and brought convenience to peoples lives. In the business world， however， fierce competition hurts small and medium-sized businesses.

BigTech refers to technology companies with an extensive global customer base that use flexible and highly automated processes to provide web and product services. Such companies have abundant working capital and sizeable operating scale， attracting numerous financial institutions to cooperate with them. They are now acting as intermediaries in the business world. In recent years， the term Fintech has become increasingly popular in banking and financial institutions. However， there is no agreed definition of Fintech so far. Based on the literature concerning other financial institutions and the views of some economists， Fintech entails financial innovation services or products provided by the banking industry or other financial institutions （as a business model） that are destructive in nature， and require new rules and regulations.

Ⅴ. Network security

With Fintech and BigTech companies using advanced AI methods， continued advances and developments in technology threaten to create financial regulatory asymmetry， which would undermine financial stability. The financial supervision system for cash focuses mainly on traditional banking businesses （Armstrong， 2006）. New financial services technologies， such as online payment and cashless society， require expertise and experience to cope with higher complexity. As complexity reduces the transparency of financial services， asymmetric information will make supervision by governments harder.

With the continuing growth of Fintech and BigTech， there is also increasing systemic risk. This is due to the interconnectedness and interdependence market participants， including fintech companies， banks， government departments， and infrastructureepartments （Bank for International Settlements， 2017）.

Ⅵ. Conclusion

Implementing a low interest rate policy can bring many advantages in the short term by encouraging consumption and increasing peoples demand for products， among other outcomes. However， the long-term implementation of low interest rates may lead to inflation， causing higher living costs and other harm to low-income people. For banks， too， low interest rates encourage excessive risk-taking， and lax lending standards increase high-risk lending. At the same time， low interest rates negatively impact on the performance of the banking industry， causing the asset quality of banks to deteriorate.

The convenience and rapidity provided by BigTech and Fintech companies have led to a sharp rise in customers using their products and services， to the detriment of traditional banks. By working with banks as intermediaries， they have increased the complexity that regulators need to contend with. The dissemination of personal data harms customers privacy. Regulators should pay more attention to the unfair arbitrage of BigTech and Fintech companies. They need to act before the consequences have a severe impact on financial businesses; only in this way will it be possible for Regulators to provide functional development space for financial stability.

References：

[1]Acharya， V. V.， and Richardson， M. （2010）.， Restoring Financial Stability： How to Repair a Failed System. New York： John Wiley & Sons.

[2]Cihák， M. （2006）. How Do Central Banks Write-on Financial Stability？. IMF Working Papers， 06（163）， p：1-5.

[3]Cihák， M. （2006）. How Do Central Banks Write-on Financial Stability？. IMF Working Papers， 06（163）， p：1-5.

【作者簡(jiǎn)介】趙佳琦（1994-），女，漢族，河北邯鄲人，研究生，研究方向：股利政策，金融穩(wěn)定性。