德银-中国金融业：建立可持续和安全的金融体系-2021.5.14正文版

DeutscheBank

Research

Asia

Cross-Discipline

Date

China

ChinaMarket

14May2021

Perspectives

Buildingasustainableandsecurefinancialsystem

KeyThemeI-Buildingasustainableandsecurefinancialsystem:The14thFYPhassetthelong-termobjectiveofChina’sfinancialsectordevelopmentastobuildasustainableandsecurefinancialsystem,anupgradeofthatinthe13thFYP.Wediscussfivedistinctionsintheupgradedobjective.Overthenextfiveyears,weexpectthe14thFYPtobringcriticalupgradestothestructure,competitiveness,inclusiveness,andopennessofChina'sfinancialsystem.

KeyThemeII:RegulatingChina'sinternetplatforms:China'sregulatoryenvironmentinthedigitallandscapehasfundamentallychanged.Inthisthematicpiece,wetrytoorganizeourthoughtsaroundthisimportantpolicychange:(1)What'stherationalebehindthegovernment'srecentactions,andwhatareitsconcernsaboutChina'sbiginternetplatforms?(2)howwillthegovernmentregulatethebigplatformsdifferentlygoingforward?and(3)whataretheimplicationsforChina'sinternetplatforms?

LinanLiu

Strategist

+852-22038709

PerryKojodjojo

Strategist

+852-22036153

YiXiong,Ph.D.

ChiefEconomist

+852-22036139

GrantFeng

ResearchAssociate

MichaelSpencer,Ph.D.

ChiefEconomist

+852-22038303

Distributedon:14/05/202101:10:11GMT

EconomicOutlook:China'sGDPgrowthslowedsequentiallyinQ1.QoQgrowthdroppedsharplyto0.6%inQ1from2.6%inQ4.GDPoutputlevelhasagainfallenbelowitspre-Covidgrowthpath.Householdincomeandspendinghavebothslowed,whilehouseholdsavingsratehasincreasedagain.Werevisedownour2021realGDPgrowthforecastby0.5pptto9.5%.Owingtothischangeingrowthoutlook,wenowexpectthePBOCwillholditspolicyratesunchangedin2021;thefirstMLFratehikewilllikelybeinthefirsthalfof2022.

RMBoutlook:Followingtherecentturninthebroaderdollartrend,andwiththeCFETSbasketnowbelowthe97level,RMBappreciationshouldresumewithouttoomuchresistancefromtheauthorities.Aswehavearguedsincelastyear,ourconstructiveRMBthesisisbasedonastrongerBoPbackdropandabullishgrowthoutlook,andthesefactorsremaininplay–especiallytheformer.However,inlightofamorechallengingcapitalaccountdynamics-includingslowerportfolioinflows

apotentialriseinUS-Chinafriction,andasizeabledividendpaymentin2Q-andwiththedollaroutlookstillunclearinthemediumterm;wearelookingforamoremodestmoveinUSD/CNYto6.3,versusourearlierexpectationof6.2.WecontinuetorecommendlongCNH/TWDtoexpressourpositiveviewonRMB.

RMBfixedincomeoutlook:WemaintainourcorebearsteepeningviewonRMBratesinMayasthebalanceofriskfactorsislikelytotilttowardsupsiderisksonRMBlongtermyieldsprimarilyduetosupplyriskandinflationexpectation.WeretainourcorelongRMBbondpositionviaCDBsbutlimitourdurationexposureuptothe3Ytenorandwewilllooktoextenddurationif10YCGByieldbreaksabove3.3%.

DeutscheBankAG/HongKong

DISCLOSURESANDANALYSTCERTIFICATIONSARELOCATEDINAPPENDIX1.MCI(P)051/04/2021.

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14May2021

ChinaMarketPerspectives

KeythemeI:Buildingasustainableandsecurefinancialsystem

Summary

Thisyear,Chinabegantoimplementits14thFiveYearPlan"2021-2025"andVision2035(“14thFive-YearPlan(2021-2025)forNationalEconomicandSocialDevelopmentandtheLong-TermObjectivesThroughtheYear2035”)withtheobjectiveofadvancingitseconomicandsocialdevelopmentwithgreaterqualitativeupgradesandgreatersustainability.UnderstandingChina’slongtermdevelopmentstrategyofitsfinancialsectorandfinancialmarket,whichisacriticalaspectofChina’s14thFYPandVision2035,willhelpusassessthemediumtolongtermtrendinChina’smacropolicyandregulatoryorientationaswellasfinancialinstitutional,structuralandfinancialmarketdevelopmentoutlook.

Throughoutthenineteensectionsandsixty-fivechaptersinthe14thFYP,Chinalaidoutacomprehensiveblueprintwithtwentykeyobjectivesofitslongtermsocialandeconomicdevelopment.FinancialsectorandcapitalmarketdevelopmentwhichdeterminesfinancialresourceallocationisclearlyavitalpartinChina’seconomicstructuralrebalancing.Webelievethe14thFYPhassetthelongtermobjectiveofChina’sfinancialsectordevelopmentastobuildasustainableandsecurefinancialsystem,whichisanupgradeof“buildingamodernfinancialsystem”,theobjectiveassetinthe13thFYP.Inourviewtheupgradedobjectivehasfivedistinctionsfromthatinthe13thFYPandwediscussindetail.

Overthenextfiveyears,weexpecttheimplementationofthe14thFYPtobringexcitingchangestothestructure,competitiveness,inclusiveness,andopennessofChina'sfinancialsystem.WepresentourthoughtsofkeyimpactsontheRMBfinancialmarketdevelopment.

Inconclusion,weexpectthe14thFYPlikelywillputChinaonapathtowardsimportantstructuralupgradesinChina'smonetarypolicyframework,financialsector,financialmarketandfinancialregulation,makingChina'sfinancialsystemmoresustainableandsecure.Inturn,suchafinancialsystemwillfacilitateproductivitygains,allowfortechnologyinnovationandsupportChina'slong-termsustainableeconomicandsocialdevelopment.Withanincreasinglytransparentandefficientmonetarypolicyframework,afastexpandingcapitalmarket,growingcapitalaccountconvertibilityaswellasavibrantgreenfinancemarket,webelievethatRMBfinancialmarketwillcontinuetoattractlongterminvestmentinflowsfromglobalinvestors.

Introduction

Thisyear,Chinabegantoimplementits14thFiveYearPlan"2021-2025"andVision2035(“14thFive-YearPlan(2021-2025)forNationalEconomicandSocialDevelopmentandtheLong-TermObjectivesThroughtheYear2035”)withtheobjectiveofadvancingitseconomicandsocialdevelopmentwithgreaterqualitativeupgradesandgreatersustainability.UnderstandingChina’slongterm

LinanLiu

Strategist

linan.liu@

+852-22038709

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ChinaMarketPerspectives

developmentstrategyofitsfinancialsectorandfinancialmarket,whichisacriticalaspectofChina’s14thFYPandVision2035,willhelpusassessthemediumtolongtermtrendinChina’smacropolicyandregulatoryorientationaswellasfinancialinstitutional,structuralandfinancialmarketdevelopmentoutlook.Inthisreport,wediscussourthoughtsonthedevelopmentstrategyinthe14thFYPrelevanttothefinancialsectorandcapitalmarketandlooktheanswertheabovequestion.

Buildingasustainableandsecurefinancialsystem

Throughoutthenineteensectionsandsixty-fivechaptersinthe14thFYP,Chinalaidoutacomprehensiveblueprintwithtwentykeyobjectivesofitslongtermsocialandeconomicdevelopment.FinancialsectorandcapitalmarketdevelopmentwhichdeterminesfinancialresourceallocationisclearlyavitalpartinChina’seconomicstructuralrebalancing.Webelievethe14thFYPhassetthelong-termobjectiveofChina’sfinancialsectordevelopmentastobuildasustainableandsecure

financialsystem,whichisanupgradeof“buildingamodernfinancialsystem”,theobjectiveassetinthe13thFYP.Inourviewtheupgradedobjectivehasfivedistinctionsfromthatinthe13thFYP.

FinancialsectordevelopmentneedstosupportChina’s“DualCirculation”economicrebalancingstrategy

AcknowledgingthatglobaleconomicrecoveryfacesunprecedenteduncertaintiesamidCOVIDinducedglobaleconomicdownturn,risingglobalprotectionismandgeopoliticaltension,Chinaispushingforthe“DualCirculation”economicrebalancingstrategywhichallowsdomesticandoverseasmarketstoreinforceeachother,withthedomesticmarketasthemainstay.Technologyinnovation,industrialandservicesectormodernization,greenandlow-carbondevelopment,andahigh-levelopeneconomyareattheheartofChina’spursuitofgrowthsustainability.Howthefinancialsectordevelopment,whichbymobilizingChina’ssizablesavings(atRMB228trnbytheendofQ12021),canbestfacilitatecreditandequitycapitalflowsanddriveinvestmentandconsumptiongrowthintoproductivesectorsandbusinesseswhicharekeytoChina’seconomicstructuralupgradewillultimatelydetermineChina’smediumtolongtermeconomicprosperity.

Deepeningfinancialsupplysidestructuralreforms

ProgressivestructuralreformsremaincrucialbehindChina’saspirationforgreatertotalfactorproductivitygainandmarketefficiencygainduringthenextfiveyearsandChinawillcontinuetopushforwardsupplysidestructuralreformstobuildahighlyadaptable,competitiveandinclusivemodernfinancialsysteminordertoeffectivelysupporttherealeconomy.The14thFYPlaidoutawiderangeoffinancialreformstobecarriedout:

Centralbankreform:Modernizethecentralbanksystemandimprovethemechanismforregulatingthemoneysupply.

Digitalcurrency:Prudentlyadvanceresearchanddevelopmentondigitalcurrencies;

Interestratereform:Improveinterestratepricingandtransmissionmechanism,improvecentralbankpolicyratesystem,strengtheningthebenchmarkloanpricingfunctionofLoanPrimeRate(LPR);

Financialinstitutionreform:Optimizethestructuraloffinancialsystemby:

Commercialbankingsector:Deepenthereformofstate-ownedcommercialbanks,improvethegovernanceofmediumandsmallbanks

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ChinaMarketPerspectives

andruralcreditcooperatives,regulatethedevelopmentofnon-bankfinancialinstitutionsandincreasesupportforinclusivefinance;(b)Policybackedfinance:Optimizeandreformthefinancingprovidedbypolicybanksbystrengtheningtheircapacitytomeetdemandforimplementingnationalstrategyandnationalplanning;(c)Insurancesector:Deepenreformsofinsurancecompaniesandimprovethecapacityofcommercialinsurancecompanies;(d)Corporategovernance:Ensurefinancialinstitutionsimprovetheircorporategovernanceandimprovethesupervisionoffinancialtransactionsbytheirshareholdersandrelevantparties;

Capitalmarketreforms:(a)Improvefinancingstructureandincrease

directfinancing:Improvethecapitalmarket'sbasicrulesanddevelopmulti-levelcapitalmarketstructuretopromotethegrowthofinstitutionalinvestorsandincreasetheproportionofdirectfinancing,especiallyequityfinancing.(b)Equitymarketreforms:Introducetheregistration-basedIPOsystemtothemainboardandnewthirdboard,improvedelistingasanormalpractice,improvetheoverallqualityoflistedcompanies,deepeningthereformofthenewOTCmarket;(c)Bondmarketreforms:Refinemarket-basedbondfinancingmechanism,steadilyexpandthesizeofthefixedincomemarket,enrichthesupplyofdebtproducts;issuelongtermCGBsandlongtermbondsforinfrastructureinvestment;(d)Financialmarketreform:Improveinvestorprotectionanddepositinsurancescheme;

Regulatoryreform:Improvemodernfinancialregulatorysystem,closeregulatoryloopholes,promotefinancialinnovationprudentlyandorderly,enhancethecomprehensiveriskcoverageregulatoryframework,improvethetransparencyand“ruleoflaw”offinancialregulation.

Fintechdevelopment:Steadilydevelopfinancialtechnology,acceleratethedigitalizationoffinancialinstitutions;strengtheningthesupervisionofriskassessmentontheusageoftechnologyandfinancialinnovation,exploreandestablishtherectificationandsuspensionmechanismofinnovativeproducts.

FinancialopeningupandRMBinternationalization:(a)Prudentlyopeningupfinancialservicesectorssuchasthebanking,securitybrokerage,insurance,fundmanagementandfutures;(b)Promotingthemutualconnectivityofonshoreandoffshorecapitalmarket;(c)Refinequalitiedforeigninstitutionalinvestorsscheme;(d)PrudentlyandsteadilypromoteRMBinternationalizationbasedonmarketdemandandcreateanewtypeofcooperationbasedonfreeusageoftheRMB.

Developgreenfinancesystemtosupportgreenandlow-carboneconomictransition

WebelieveChinaiskeentopromotegreentransformationineveryareaofeconomicandsocialdevelopmentoverthenextfiveyearstomeetitsambitiouslongtermclimateinitiatives(peakcarbonemissionin2030andcarbonneutralityin2060)byguidingfinancialresourcesallocationtogreendevelopmentareas.SpecificallyChinawill(a)developmulti-levelgreenfinancemarket,supportcarbonemissionexchangemarket;(b)promoteESGandencouragebankingsectorstoacceleratethedevelopmentofgreenfinanceproducts,introducedomesticgreentaxonomywhichalignswithinternationalstandard;(c)supportregionalcooperationongreenfinanceundertheBeltandRoadInitiativeandattractforeigninvestmentintoChina’sgreenassets.

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Emphasizeonpolicycoordination

Moreemphasishasbeenplacedonthesystemthinkingandpolicycoordination,whicharefundamentaltotheeffectiveimplementationoffinancialdevelopmentstrategiesinthe14thFYP.Webelievetherearefourkeyareasofpolicycoordination:

Coordinatingmonetarypolicyandfiscalpolicytosupportmultipleeconomicgrowthtargetssuchasjobcreation,consumption,investmentgrowth,industrysectorgrowth,regionaleconomicdevelopment,greendevelopment,etc.

Coordinatingdevelopmentpoliciesinthefinancialservicesector,technologyinnovation,industrialupgradeandgreendevelopment.Duringthe14thFYP,Chinaislookingtomodernizeitsindustrialsystemwhichhasfourimportantpillars,namelytherealeconomy,techinnovation,modernfinance,andhumanresourcesdevelopment.Assuchfinancialsectordevelopmentneedstotakeintoconsiderationthedevelopmentneedsoftheotherthreepillars.Specifically,itisnecessarytoconsiderpoliciestoincentivizefinancialinstitutionstoprovidelongtermfinancingtosupportmanufacturingsectorandservicesectorupgrades,toguideinvestmenttonewstrategicindustrialsectors;topromoteinclusivefinanceandlowerthemarketaccesstoaffordablefinancingtomicrofirms,smallbusinessesandprivatebusiness;andtosupportruralvitalizationandprovidefinancialservicestobusinessandhouseholdsintheruralareasandtheagriculturesectortownships.

Coordinatingandcooperatingwithglobalpartnersandinternationalfinancialinstitutionsonglobal/multilateralinitiatives.WeexpectChinatoseekfurthereconomicandfinancialcooperationwithothercountriesandinternationalfinancialinstitutionsinimplementingregionaltradeagreementssuchastheRegionalComprehensiveEconomicPartnership(RCEP)AgreementandtheChina-EUComprehensiveAgreementonInvestment,aswellaswithdevelopingcountriestoadvanceitsBRIandthehealthy,green,anddigitalSilkRoadinitiatives.

Coordinatingbetweenfinancialsectordevelopmentandfinancialsecurity.FinancialstabilityinrecentyearshasbecomeoneofChina'smacropolicypriorityandhardlessonshavebeenlearntoverthepastdecadeonthedestabilizingeffectfromrapidprogressonfinancialliberalization,especiallywiththesignificantdevelopmentinfinancialtechnologybothdomesticallyandglobally.Moreover,asChina'sdomesticeconomyanddomesticmarketisincreasinglyintegratedwiththerestoftheworld,itisinevitablethatglobalmacropoliciesandglobalfinancialmarketvolatilitieswillspillovertoChina'sdomesticfinancialmarket.Thisarguesforbettercoordinationbetweenfinancialdevelopmentandsecurity.Wewilldiscussmoreinthenextpart.

Implementfinancialsecuritystrategy:

The14thFYPstressestheimportanceofbalancingdevelopmentandsecurityandputsfinancialsecuritystrategy,alongwithfoodandenergysecurityaskeyareasofnationaleconomicsecurity.Afinancesecuritystrategyisimplementedwiththegoaltostrengthenthemarketandregulatoryframeworkinordertoidentifyandmitigatethemediumtolongtermfinancingrisks.The14thFYPconsidersfivemainareastoensurefinancialsecurity.

Improvesystemsforprevention,earlywarning,handling,andaccountabilitywithregardtofinancialriskstodefendfinancialstability.

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Refinemacro-prudentialframeworkandkeepmacroleverageconditionstable;

Strengtheningsupervisionofsystemimportantfinancialinstitutions,preventandmitigatetheriskofshadowfinancing,allowfororderlyexitofhigh-riskfinancialinstitutionsandimprovesustainablefinancialregulationoverinternetfinance;

Refinedebtrisksurveillanceandearlywarning,improvethehandinganddisposalofcreditdefaultinthebondmarket,promotecommonlawenforcementinthefixedincomemarket,unwindrisksassociatedwithlocalgovernmentcontingentliability,severelypenalizestrategicdefaults;

Improveregulatoryframeworkovercrossborderflows,strengtheningtheconstructionofRMBcrossborderpaymentsystem,ensurethesecurityofinformationtechnologyinthefinancialsectoranddefendthesecurityoffinancialinfrastructure.

KeyimpactontheRMBfinancialmarket

Overthenextfiveyears,weexpecttheimplementationofthe14thFYPtobringcriticalupgradestothestructure,competitiveness,inclusiveness,andopennessofChina'sfinancialsystem.OntheRMBfinancialmarket,weseethefollowingfivekeyimpacts:

Chinawillformallyestablishamodernmonetarypolicyframework:AsrecentlyelaboratedintheQ1monetarypolicyreport,weexpectChinatocarryoutfinancialreforms(centralbanksystemreforms,interestratereformsandexchangeratereforms)toestablishamodernmonetarypolicyframeworkbasedonthefollowing:(a)quantitivetargets:Toachievetheultimateobjectiveofmaintainingpricestabilityandsupporteconomicgrowth,thePBoClookstokeeptheintermediatetargets,namelyM2growthandaggregatesocialfinancinggrowth(similartoM3inmajoreconomies),atsimilarpaceasChina'snominalGDPgrowth,whichwillbearound8-9%basedonouraveragerealGDPgrowthexpectationof5-6%andCPIat3%during2021-2025;(b)interestratetargets:OMOratesandMLFratesarekeypolicyrates,andmonetarypolicyistransmittedbyallowingbenchmarkmoneymarketratestofluctuatearoundtheOMOrates(forexample7Dreversereporate),andbyMLFtoLPRrates,whichthenaffectmediumtermrealinterestratesinthefinancialmarket,bankloanmarketandtherealeconomy;meanwhileallowforgreatertwo-wayvolatilityofRMBexchangerate;(c)enhancepolicytoolkitandimprovemoneysupplyadjustmentmechanism.NewpolicytoolsincludeissuingperpetualbondstorecapitalizecommercialbanksandremovingtheimplicitflooronLPRratetolowerlendingrate.Furthermore,ChinawillrefinethelegalframeworkgoverningtheCentralBankandfinancialinstitutions.Notably,China'sCentralBankLawisundergoingthefirstmajoramendmentsince2003andaccordingtothedraftamendment,theNewCentralBankLawwilllikelyincorporateeightkeychangesincludinggrantingadditionalmandatestothePeople'sBankofChina,establishingthemonetarypolicy+macroprudentialpolicy(two-pillar)framework,restatingtheprincipalthattheCentralBankisprohibitedfromdirectlypurchasingCGBsorothergovernmentdebtandfromlendingtolocalgovernment(prohibitingthemonetizationoffiscaldeficits),addingthedigitalRMBasthelegaltenderhavingthesamelegalpositionandprotectionoflawaspapernotesandcoinsetc.

Capitalmarketfinancingwilllikelyaccountfor40%ofaggregatesocialfinancinggrowthduring14thFYP:Webelievecapitalmarketfinancingwilldrivethegrowthofaggregatesocialfinancinginthenextfiveyears.China’s

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capitalmarketwitnessedsubstantialgrowthoverthepastdecade,andtheoutstandingbalanceofdirectfinancing,consistingofnon-bankcorporatebondfinancing,non-bankcorporateequityofferingandgovernmentbondfinancing,rosefrom12%ofChina'soutstandingbalanceofaggregatesocialfinancingin2012,to25%inJanuary2017andto28.4%bytheendofApril2021.Duringthe13thFYP,publicandprivatesectorsraisedRMB41.1trnfundingdirectlyinChina'scapitalmarket,implyingtheshareofdirectfinancingat32.4%ofChina'snewaggregatesocialfinancing,upfrom17%during2012-2015.Thebreakdownofdirectfinancingshowsthatwhiletheshareofnewbondandequityfinancingbycorporatewentupduringthe12thFYP,theywerefairlystaticduringthe13thFYP,andgovernmentbondfinancingcontributedprimarilytotheriseindirectfinancing(especiallyin2020).Duringthe14thFYP,consideringChina'soverallmacroleveragerisk,policysupportwilllikelyfocusonequitymarketfinancing,howeverbondfinancinglikelywillremainrobustduetodemandforgreenfinance,infrastructurefinanceaswellascorporationsinvestmentintonewstrategicindustrialandservicesectors,thereforeweforecastnewdirectfinancingtoaccountfor40%ofaggregatesocialfinancinggrowthbytheendof2025.

Growingsupplyoflongdatedgovernmentbondsandinfrastructurebonds.Interestinglythe14thFYPhighlightstheplantosupplymorelongdatedgovernmentbondsandinfrastructurebonds.Itisnotclearwhattenorthe"longdated"refersto.TheaveragelifeofoutstandingCGBsandLGBsis6.7yearsand6.5yearsrespectively,currently87%oftheoutstandingCGBsand84%ofoutstandingLGBswillmaturewithinthenext10yearsandtheremainingdebtredemptionprofilestretchesto50YtenorforCGBsand30YtenorforLGBs.Thematurityprofileofgovernmentdebtsuggestsitisreasonabletoextenddurationandthe14thFYPindicatesthegovernmentiswillingtodoso.Wethinkitislikelylongbondwillbeinthe30Yto50Ytenor.Chinabegantoissue50YCGBsin2018andsofarfiveseriesof50YbondshavebeenissuedvianineauctionswithatotaloutstandingamountofRMB339bn.Duringthepastthreeyears,Chinaalsoincreasedthesupplythe30YtenorfromaboutRMB100bnannuallyduring2016-2017toRMB363bnannuallyduring2018-2020(in2020,RMB475bnsupplyof30YCGBs).Weexpecttheaverageannualsupplyof50YCGBstodoubletoRMB200bnand30YCGBstorisetoRMB500bnduring2021-2025.WethinktheinfrastructurebondswilllikelyreplaceLGFVdebtandbecomeanewfinancingtooldedicatedtosupportlongterminfrastructureprojects.Currentlyabout95%ofoutstandingLFGVdebtwillmaturewithinthenextsixyearsandwethinktheinfrastructurebondswillmeetlong-datedinfrastructureinvestmentdemand(10Yorlonger).

RMBwillbecomeamoreinternationalizedcurrency.WebelievetheopeningupofChina'sfinancialsectorandfinancialmarket,capitalaccountliberalizationreforms,andRMBexchangeratebeingincreasinglymarket-drivensupportsabroaderadoptionofRMBasasettlementcurrencyinglobaltradesandfacilitatethemediumtermintegrationofChina'sfinancialsystemwiththeglobalfinancialsystem.ThelikelyadoptionofdigitalRMBforcrossbordertransactions,enhancementofRMBcrossborderpaymentinfrastructure,RMBinvestmentandfinancingdemandarisingfromtheBRIandSilkRoadInitiativesandRMBtradesettlementdemandfrommultilateraltradeandinvestmentagreementsallwillfurthersupportRMBinternationalization.WeretainourexpectationthatstructuraldemandbyglobalreservemanagersaswellasactiveandpassiveglobalinvestorsforRMBbonds/RMBassetsallocationcontinuetodriveoffshoreinflows.WeretainourforecastthatcumulativeoffshorebondinflowswillreachRMB4trn(USD590bn)during2021-2025andtheshareofRMBassetsinglobalofficialreserveswillmorethandoublefromitscurrentleveltoabout5%by2025.

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Greenfinancemarketshouldtakeoff.Toachievepeakcarbonemissionby2030andcarbonneutralityby2060,ChinamayneedtoinvestRMB15trnintogreenandESGprojectsduring14thFYP,implyingsignificantESGinvestmentandfinancingopportunitiestoinvestorsandborrowers.AsoftheendofQ1,twenty-onecommercialbankshadRMB13trnoutstandinggreenloans,upby9%fromtheendof2020.China'sgreenbondmarketsawsupplyofRMB179bngreenbondssofarthisyear,about71%ofthegrossgreenbondissuancein2020,takingtheoutstandingbalanceofgreenbondstoRMB1.18trn.WeexpectgreenfinancingdemandtobemetprimarilyinloansandbondsmarketandforecasttheoutstandingbalanceofgreenloansatRMB25trnandgreenbondmarketsizetoalmosttripletoRMB3.3trnbytheendof2025.Moreover,carbon-basedinvestmentandtradingwilllikelyseeexcitingdevelopmentandweexpectChinatolaunchcarbonemissionrightsexchangesometimeinthemiddleof2021.

Inconclusion,weexpectthe14thFYPlikelywillputChinaonapathtowardsimportantstructuralupgradesinChina'smonetarypolicyframework,financialsector,financialmarketandfinancialregulation,makingChina'sfinancialsystemmoresustainableandsecure.Inturn,suchafinancialsystemwillfacilitateproductivitygains,allowfortechnologyinnovationandsupportChina'slong-termsustainableeconomicandsocialdevelopment.Withanincreasinglytransparentandefficientmonetarypolicyframework,afastexpandingcapitalmarket,growingcapitalaccountconvertibilityaswellasavibrantgreenfinancemarket,webelievethatRMBfinancialmarketwillcontinuetoattractlongterminvestmentinflowsfromglobalinvestors.

Figure1:Breakdownofoutstandingdirectfinancing(%ofaggregatesocialfinancing)

18

Equityoffering

Govtbonds

Corpbond

16

14

12

10

8

6

4

2

0

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Jan-21

Apr-21

Figure2:Directingfinancingaccountedforabout28.4%ofoutstandingaggregatesocialfinancing(%ofaggregatesocialfinancing)

70 DirectfinancingShadowfinancingIndirectfinancing

60

50

40

30

20

10

0

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Apr-19

Jul-19

Oct-19

Jan-20

Apr-20

Jul-20

Oct-20

Jan-21

Apr-21

Source:DeutscheBank,Wind

Source:DeutscheBank,Wind

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Figure3:Brea