"China Finance" | Yu Wenjian: Promoting the Construction of a Financial Power through High-Quality Development of the Gold Market - Accelerating the Construction of Independent, Controllable, Safe and Efficient Financial Infrastructure

"The Compilation of Xi Jinping's Discourses on Financial Work" contains a series of important expositions by Comrade Xi Jinping on major theoretical and practical issues concerning the development of the financial industry. With lofty vision, rich connotations, and profound thoughts, it has elevated our Party's understanding of the essential laws and development path of financial work to a new height. It represents an important innovative achievement of Marxist political economy on financial issues and constitutes the financial chapter of Xi Jinping's economic thought. It is of great significance for unswervingly following the path of financial development with Chinese characteristics in the new era and new journey, advancing high-quality financial development, accelerating the building of a financial power, and providing strong financial support for comprehensively advancing the great cause of building a strong country and national rejuvenation through Chinese modernization. This journal specially sets up a column to sort out and summarize the financial system's study and implementation of "The Compilation of Xi Jinping's Discourses on Financial Work," and transform the learning results into concrete actions and practical effects in unswervingly following the path of financial development with Chinese characteristics, promoting high-quality financial development, and accelerating the building of a financial power.

Author | Yu Wenjian [Party Secretary and Chairman of the Shanghai Gold Exchange]

Article | "China Finance" 2024 Issue 12

General Secretary Xi Jinping emphasized at the opening ceremony of the special training class for major leading cadres at the provincial and ministerial levels on promoting high-quality financial development, "To build a financial power, we must accelerate the construction of a modern financial system with Chinese characteristics, and establish and improve a scientifically sound financial regulation system, a rationally structured financial market system, a coordinated financial institution system, a complete and effective financial supervision system, a diversified and professional financial product and service system, and an independent, controllable, safe and efficient financial infrastructure system." As a financial infrastructure unit, the Shanghai Gold Exchange must earnestly study and implement the spirit of General Secretary Xi Jinping's important speech, accelerate the construction of an independent, controllable, safe and efficient gold market financial infrastructure, and boost the building of a financial power through high-quality development of the gold market.

The Party Central Committee attaches great importance to the construction and development of financial infrastructure

Since the 18th National Congress of the Communist Party of China, the Party Central Committee with Comrade Xi Jinping at its core has attached great importance to the construction and development of financial infrastructure. In November 2013, the Third Plenary Session of the 18th Central Committee of the Communist Party of China adopted the "Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reform," which pointed out the need to "strengthen the construction of financial infrastructure to ensure the safe, efficient operation and overall stability of financial markets." Since then, General Secretary Xi Jinping has made important instructions on how to build a financial infrastructure system and strengthen the supervision of financial infrastructure on many occasions, including at the collective study sessions of the Political Bureau of the Central Committee, meetings of the Central Committee for Comprehensively Deepening Reform, and national financial work conferences.

In October 2023, General Secretary Xi Jinping delivered an important speech at the Central Financial Work Conference, which scientifically answered a series of major theoretical and practical issues in the development of the financial industry, put forward for the first time the goal of building a "financial power," and pointed out the need to "build a modern financial system with Chinese characteristics that is highly adaptable, competitive, and inclusive," including "forming an independent, controllable, safe and efficient financial infrastructure system." In January 2024, General Secretary Xi Jinping further elaborated on "establishing and improving an independent, controllable, safe and efficient financial infrastructure system" at the opening ceremony of the special training class for major leading cadres at the provincial and ministerial levels on promoting high-quality financial development, requiring "strengthening overall planning, improving market access, regulatory standards and operational requirements, and enhancing the independent level and the safety and reliability of software and hardware of key financial infrastructure," pointing out the direction for the construction and development of financial infrastructure.

Financial regulatory authorities such as the People's Bank of China have always thoroughly implemented the important instructions of the Party Central Committee and General Secretary Xi Jinping on the construction and development of financial infrastructure, actively promoted the introduction of relevant regulatory rules and institutional measures such as the "Work Plan for Coordinated Supervision of Financial Infrastructure" and the "Measures for the Supervision and Administration of Financial Infrastructure (Draft for Comment)," built and improved the top-level design of supervision, strengthened the function of financial infrastructure, effectively maintained market stability, and strictly adhered to the bottom line of preventing systemic financial risks.

After years of development, China's financial infrastructure construction has made considerable progress, providing strong support for the stable operation of China's financial system. However, there are still some areas that need to be improved. We must resolutely implement General Secretary Xi Jinping's requirement of "improving an independent, controllable, safe and efficient financial infrastructure system" and go all out to promote the construction and development of financial infrastructure.

Connotation, characteristics and functional evolution of financial infrastructure

Financial infrastructure has rich connotations. Internationally, it is generally believed that in a broad sense, financial infrastructure refers to the basic operational institutional settings, technical systems and related institutional arrangements that ensure the safe and efficient operation of financial activities, including both "hardware" facilities such as information systems and databases, and "software" facilities such as the financial legal environment and social credit environment. In a narrow sense, financial infrastructure refers to institutional settings that are public in nature and used by market participants to ensure the normal operation of financial markets. The domestic definition of financial infrastructure first appeared in the "China Financial Stability Report (2005)" issued by the People's Bank of China in 2005, which defined financial infrastructure as "the hardware facilities and institutional arrangements for financial operations." In 2020, the "Work Plan for Coordinated Supervision of Financial Infrastructure" jointly issued by six departments including the People's Bank of China clarified that "financial infrastructure refers to systems and institutional arrangements that provide basic public services for various financial activities, occupy a hub position in the operation of financial markets, and are the basic guarantee for the stable and efficient operation of financial markets." In 2022, the People's Bank of China issued the "Measures for the Supervision and Administration of Financial Infrastructure (Draft for Comment)," which further clarified the classification of financial infrastructure, namely, financial infrastructure refers to financial asset registration and depository systems, clearing and settlement systems (including central counterparties engaged in centralized clearing business), trading facilities, trade repositories, important payment systems, and basic credit reference systems.

Financial infrastructure is the hub of the financial ecosystem and has a significant spillover effect and driving effect on economic and financial development. It has functional characteristics such as functional fundamentality, network effect, and scale effect, and operational characteristics such as combining public welfare and scarcity, the correlation between operational conditions and the development of national financial markets, and balancing the contradiction between market operation and public interests through supervision and other means. From the perspective of the responsibilities undertaken by financial infrastructure, it also has three-level functions of service, resource allocation, and risk management, which continuously evolve with changes in the economic environment, restrict and promote each other, showing a progressive and balanced dynamic relationship, and reflecting and practicing the fundamental purpose of serving the real economy.

China's financial infrastructure construction not only follows the objective laws of modern financial development but also pays attention to combining the distinctive characteristics of China's national conditions, exploring a path of financial infrastructure construction and development with Chinese characteristics: first, the "top-down" guidance of regulatory authorities on financial infrastructure; second, clarifying the public interest orientation of financial infrastructure operations; third, market entities "bottom-up" taking the initiative to cooperate with regulatory authorities to strengthen risk management; fourth, all parties in the market "from the outside in" learning from international experience to improve the governance structure.

Practical exploration in the construction of China's gold market infrastructure

As a financial infrastructure unit, since its establishment, the Shanghai Gold Exchange has always been committed to serving national strategies, the real economy, and the performance of duties by the People's Bank of China. It has focused on improving and optimizing the construction of information systems, product businesses, supporting services, and corporate governance, gradually forming a relatively complete market trading and market service system, promoting the leapfrog development of China's gold market from scratch, from small to large, and from weak to strong, and giving full play to the strategic supporting role of important financial infrastructure.

First, continuously strengthening the construction of information systems, further consolidating the foundation of autonomy and reliability. Efforts have been made to strengthen technological innovation, independently research and develop, launch, and continuously iteratively upgrade key core systems, and comprehensively enhance the operational stability of information systems. A "two locations and three centers" system architecture has been built, distributed in Shanghai and Shenzhen, covering the production operation center, the same-city disaster recovery center, and the remote disaster recovery center, continuously improving the level of emergency response capabilities. Second, constantly enriching the product and business system, further deepening the marketization and internationalization process. Firmly serving the real economy and industrial development, strengthening product and business innovation, building and improving a diversified market product system consisting of auction, inquiry, pricing, and lending markets, integrating the main board market and the international board market, with continuously enhanced market influence and international competitiveness. The auction market has launched 17 auction contracts in four categories: spot physical, spot immediate, spot deferred delivery, and cash-settled deferred. The inquiry market has launched 14 inquiry products including spot, forward, and swap for gold and silver, as well as 2 interbank gold inquiry businesses. The pricing market has launched "Shanghai Gold" and "Shanghai Silver" centralized pricing contracts. Third, focusing on improving infrastructure functions, further improving one-stop and efficient services. On the basis of providing market trading, optimize and improve supporting services such as precious metal physical delivery, storage and transportation, fund clearing and settlement, and market information inquiry to meet the diversified needs of market participants. Fully启动 the construction of a gold market trade repository to effectively serve regulatory requirements and public data needs. Fourth, in-depth promotion of corporate governance reform, further highlighting the characteristics of Chinese modernization. Firmly following General Secretary Xi Jinping's earnest instructions to the Shanghai Gold Exchange, "Continue to pioneer and innovate, be proactive, and make new contributions to the development of China's gold market," we organically integrate the Party's overall leadership with corporate governance, give full play to the Party Committee's leading role in setting the direction, managing the overall situation, and ensuring implementation, focus on the main responsibilities and main businesses, further promote comprehensive and strict Party governance, prevent and resolve financial risks, improve internal management efficiency, and continuously transform the political advantages of the Party's leadership into the competitive advantages of the exchange's development.

Development trends of international important gold market infrastructure

For a long time in the past, international gold trading was mainly concentrated in the United Kingdom and the United States. Other gold markets with certain regional influence include Japan, India, Switzerland, Hong Kong of China, Dubai, etc. Among them, the United Kingdom adopted the over-the-counter trading model, while others mainly conducted trading in exchanges. With the continuous development of the global economy and the increasing prosperity of the gold market, the gold market infrastructure has undergone significant changes in the past few decades, showing the following five main trends on the whole.

Second, the trading attribute has shifted from commodity to financial. With the release of Basel III, physical gold has been adjusted from Tier 3 capital, which was less safe and limited in scale, to the highest-quality zero-risk asset (core capital), prompting the financial attribute of gold to become the dominant attribute, affecting changes in gold prices, and directly reflected in the change in the investor structure with increased participation of medium and long-term funds such as insurance and pension funds.

Third, the regulatory model has shifted from single to multiple. With the continuous enrichment of gold market trading varieties and trading methods, the drawbacks of single supervision have gradually emerged and been challenged, promoting the transformation of the regulatory model to a multiple supervision combining government supervision, industry self-discipline supervision, and exchange self-discipline supervision (governance), with more emphasis on the collaborative cooperation among regulatory entities to more effectively respond to market risks and challenges and ensure the fairness, transparency, and stability of the market.

Fourth, the principle of tax policy formulation has shifted from neutrality to efficiency first. As an international commodity, gold has unique liquidity, making it widely used globally. Compared with other commodities and financial products, the price trend of gold is basically the same in various countries. Therefore, when formulating tax policies, major international gold markets must fully consider the unique attributes of gold to avoid excessive differences between domestic gold prices and international gold prices, which would affect investors' returns. For example, the two major gold markets in London and New York have adopted the principle of efficiency first when formulating tax policies, which has strongly promoted the prosperity and development of the gold market. On the contrary, places such as South Africa have no preferential tax policies for gold trading, which has restricted the development of the local gold market. At present, the infrastructure of major international gold markets has successively implemented preferential tax policies for gold.

Fifth, the business philosophy has shifted from extensive to green. With the increasing awareness of environmental protection worldwide, various countries have successively implemented mandatory ESG information disclosure policies, and major gold markets have also integrated green concepts into daily operations, shifting from extensive development to green and environmentally friendly development.

Boosting the construction of a financial power through high-quality development of the gold market

At present, China's gold market is facing a new situation and new requirements of further deepening high-quality development and boosting the construction of a financial power, and is in the midst of the "five shifts" development trends of the international gold market. The Shanghai Gold Exchange will continue to be guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, resolutely implement the work arrangements of the Party Central Committee and the Party Committee of the People's Bank of China, adhere to the general work tone of seeking progress while maintaining stability, accelerate the construction of an independent, controllable, safe and efficient gold market financial infrastructure, prevent and resolve various risks, strive to improve the quality and efficiency of serving the real economy, boost the construction of a financial power through high-quality development of the gold market, and follow the path of gold market development with Chinese characteristics.

First, based on the "foundation," improve modern governance, and coordinate the "integrated" management of the Party and the enterprise. Adhering to and strengthening the Party's overall leadership is the fundamental guarantee for the Shanghai Gold Exchange to achieve various achievements. The Shanghai Gold Exchange will closely focus on promoting Chinese modernization, the most important politics, adhere to the Chinese characteristics, grasp the direction of modernization, focus on the theme of high-quality development, use Party building to guide the development direction, self-revolution to ensure the development foundation, governance reform to stimulate development vitality, and cultural construction to lay a solid development foundation, continuously strengthen political guidance, and promote the organic integration of Party management and enterprise management, and the deep integration of Party building and business.

Second, based on "independence," strengthen technological innovation, and promote the "upgrading" of core systems. Adhering to independent research and development, independent innovation, and taking the path of independence is an important prerequisite for maintaining financial security and ensuring the independence and controllability of China's gold market. The Shanghai Gold Exchange will unswervingly implement the deployment requirements of the Party Central Committee and the Party Committee of the People's Bank of China, continue to increase technological investment, accelerate independent research and development, strengthen innovation while upholding fundamental principles, optimize information technology security management and improve service efficiency, firmly grasp key core technologies and resources, and fully ensure the safety, stability, and reliability of the gold market.

Third, based on "controllability," promote institutional construction, and build a sound market "ecological chain." Elements such as institutional supervision, judicial environment, and self-discipline management are important cornerstones for the operation of gold market infrastructure. The Shanghai Gold Exchange will take the initiative to integrate into the construction of a complete and effective financial supervision system, strengthen research on gold market systems, promote high-level legislation for the gold market and optimization of the judicial trial environment, strengthen self-discipline management of the gold market, accelerate the improvement of the trade repository, and comprehensively build a sound market ecology.

Fourth, based on "safety," improve the risk control system, and ensure "no dead ends" in risk management. Financial infrastructure objectively has the characteristics of risk aggregation and risk linkage, which requires that preventing and resolving major risks must be placed in the first place, and the bottom line of preventing systemic risks must be firmly established. The Shanghai Gold Exchange will continue to optimize the comprehensive risk management system, improve risk classification management, promote differentiated management of business risks, strengthen the prediction and emergency management of risk events, fulfill the anti-money laundering responsibilities of the gold market, do a good job in investor risk education, and firmly establish the bottom line of preventing systemic risks.

Fifth, based on "efficiency," optimize products and businesses, and achieve "high-quality" market services. Serving the real economy is the bounden duty and purpose of finance. The Shanghai Gold Exchange will always take serving the real economy as the starting point and goal of its work, improve the supply of existing products and services, strengthen the delivery, storage, and transportation functions, improve the clearing and settlement system, give play to the potential of lending business, comprehensively improve the service efficiency and level of trading, delivery, clearing and settlement, lending and other businesses, and provide more efficient financial infrastructure functions for the real economy. At the same time, we will adhere to coordinating financial opening-up and security, focus on serving the internationalization of the RMB and the construction of Shanghai as an international financial center, deepen the interconnection of domestic and foreign gold markets, participate in the establishment of an international rule system and a global RMB gold pricing center, promote the construction of global gold market standards, and continuously improve the level of opening-up of the gold market.