The National Finance Work Conference was held on January 7. Such work conferences are held once every five years and set the medium-term reform agenda for the financial sector. For investors, the key messages from this Saturday conference are the plan to introduce of a deposit insurance scheme (positive for smaller banks) and the likely increase in monetary policy flexibility. Following are a few details.

1) The conference highlighted the importance of preventing systemic risks in the financial sector, and we believe that a deposit insurance system will be introduced in the near term as the most concreted policy action in this direction. This reform will be positive for smaller banks, as it will help reduce the probability of small bank failure and contain their deposit costs in a liberalized interest rate environment.

2) The prudent stance of monetary policy should be maintained, but flexibility will be further increased. In our view, “increased flexibility” implies that the current monetary and loan growth targets are likely be exceeded when economic growth indicators come in lower than government expectations in the next few months.

3) Financial sector development should support the real economy rather the “fictitious” economy. Stronger credit support should be given to on-going infrastructure projects, public housing, SMEs, and technology upgrading. On the other hands, speculative investments and other financial activities should be discouraged.

4) The conference reiterated the plans for other reforms, including interest rate liberalization, exchange rate flexibility, and the opening of the capital account, but with no additional specifics.

• [Editor:editor]