Financial development, technological innovation and consumption-led growth

Speech by Mr Agustín Carstens, General Manager of the BIS, at the Financial Street Forum 2020, 21 October 2020.

BIS speech  | 
21 October 2020

I want to thank the organisers, and in particular the People's Bank of China (PBC), for inviting me to join the annual Financial Street Forum. It is a great honour to be speaking at this important event. My only regret is that I am not able to join you in person. I still remember vividly the symposium on RMB internationalisation that the BIS co-organised with the PBC in Beijing one year ago. The BIS values its smooth and close cooperation with the PBC over the years. I hope that I will be able to visit you in China sometime soon.

Uncertainty has increased, hindering consumption-led growth

The Covid-19 pandemic has increased uncertainty and pressures on firms and households globally. Countries like China have shown that these problems can be overcome with strong policy measures. Like many other central banks, the PBC stretched far with policy actions to provide liquidity and support households and firms during the crisis. The latest IMF World Economic Outlook suggests that China is the only G20 economy which will rebound this year.1  Other countries are learning from its experience.

The hope is that the uncertainty will subside globally over the next year. However, in the near term, the pandemic and the anxiety it generated will still dominate. In many economies, households have increased their precautionary savings and restrained their consumption. The latest data from China show that economic growth has been led by government investment in infrastructure, while consumer spending and activity in the service sector have struggled to keep up.

The short-term challenges posed by the pandemic have not kept China from continuing to pursue its longer-term reform agenda, which is to move to a more consumption-led growth model. Making consumption a stronger source of growth would help China's transformation to a service-oriented economy, create more internal economic stability and reduce the exposure to external shocks. Such rebalancing can also increase productivity and promote a more sustainable and environmentally friendly economy.

Many policy actions and reforms could be taken to help achieve this objective. I would like to highlight two of them today: financial market deepening and technological innovation as useful channels to support economic rebalancing.

A robust and efficient financial system can help with the economic rebalancing

After the Great Financial Crisis, China embarked on a multi-year programme to boost domestic consumption by promoting consumer credit markets, improving social safety nets, developing the service sector and raising household income from investments. But household saving rates remain high - particularly precautionary savings from lower-income households. If people's health and pension outlays were more secure, households could save less, as they would need to set fewer resources aside to deal with uncertainty. From a macroeconomic perspective, more secure social protection could reduce the dependence on self-insurance, and bring the aggregate national savings to a level better suited to the country's development level and demographic structure.

The Covid-19 pandemic has heightened uncertainty and expectations of higher future health care and living costs, especially for the elderly. Therefore, accelerating the development of social safety nets in China, including a more efficient pension system, would have great benefits today. The crisis could thus have a silver lining.

A deeper and more diversified financial sector - including a more dynamic pensions market - has much to offer here. Insurance markets are an example. Without health insurance, all of us would be saving more individually than what is needed collectively. Well functioning insurance markets that guard against risks of large, unforeseen medical expenses would thus help boost consumption.

China's financial markets have already deepened over the past few decades. Market capitalisation of credit instruments has increased by 27% annually between 2010 and 2019. Foreign participation has also increased. This more diverse investor base has enhanced market liquidity.

But more can be done to make financial markets both supportive of consumption-led growth and more resilient. According to a recent report by the BIS's Committee on the Global Financial System,2 relative to its economic weight China still has a limited presence of domestic institutional investors, such as pension funds, insurance companies and other long-term asset managers. The organisational structure of markets matters as it has important implications for market liquidity, competition and efficiency.

In this regard, pension market growth can be a catalyst for developing deep and liquid capital markets. Institutional investors, including pension funds, can help improve market liquidity, contributing to depth of trading and the development of derivative products and hedging instruments. Professional investors also tend to focus on long-term investment potentials and thus help reduce herd mentality and irrational market movements.

A dynamic pension market brings other benefits. Pension funds tend to purchase bonds to back the steady cash flows for pension members, so their participation can support the development of bond markets and enhance the signals provided by market interest rates for the implementation of monetary policy. Meanwhile, greater use of equity markets, including more institutional investor participation and more sectoral diversity for listed companies, can help shift from capital-intensive growth to the more intangibles-intensive investment that caters to the modern service-based economy. By reducing the weight of the banking sector in intermediating savings, while increasing that of institutional investors, China can boost its long-term growth prospects and diversify its financial system. In addition, if the banking sector comes under stress, securities markets can also serve as a valuable spare tire.

In sum, by promoting high-quality savings for the long run, developing a dynamic and diversified pension market will help to remove uncertainties and concerns that are holding back current consumption and support China's efforts to rebalance its economy.

Technology could be a useful vehicle to channel reforms

How can technology help? We have already seen in China that technological advances have transformed the country's payment system and helped accelerate banking sector reforms. China now has a unique opportunity - as well as an added urgency - to leverage its vast digital ecosystems and new technology to broaden and deepen its health and pension services.

Digital services can support health care provision. Before the pandemic, large technology firms in China already leveraged their networks of data collected from customers' online activity to enter the private insurance industry and insure the previously uninsured at affordable prices. This can be scaled up further. The pandemic has stimulated the development of virtual medicine platforms to ensure safe and quick doctor consultation.3  These have been facilitated in China by the authorities' decision to have public health insurance cover certain online medical services.

Digitisation can also boost financial literacy, by familiarising people with long-term financial planning, including retirement financing. Some big techs have offered robo-advisory services to provide users with retirement-related tools (such as saving calculators, comparative information about various pension products and general advice).

In the medium term, technological innovation can speed up pension reforms in China. For one thing, fintech solutions could address some pain points encountered in the ongoing reforms. As former PBC Governor Zhou Xiaochuan has pointed out, distributed ledger technology can be used to handle payments from multiple sources for a single insured person, thus enabling pension portability.4

The key is this: technology is a more and more integral part of our lives. Over the longer term, technology - together with financial sector reform - can help China transition to a more resilient service-based economy, and meet its sustainable growth objectives.


A robust financial system and a climate conducive to technological innovation - which the authorities in China have been fostering for some time - will be more beneficial than ever in the post-Covid-19 world. Together they can address three current challenges that China faces: reducing uncertainty and boosting consumption; bridging to the medium-term goal of consumption-led growth; and improving the quality of resource allocation in the economy.

We at the BIS will continue to do our part, from both our head and our regional offices, to foster cooperation among central banks around the world to support both financial stability and financial innovation.

Thank you.

1       IMF, World Economic Outlook: a long and difficult ascent, October 2020.

2       Committee on the Global Financial System, "Establishing viable capital markets", CGFS Papers, no 62, January 2019.

3       See C Cantú, G Cheng, S Doerr, J Frost and L Gambacorta, "On health and privacy: technology to combat the pandemic", BIS Bulletin, no 17, May 2020.

4       Zhou Xiaochuan, "Facing up to pension reform", Caixin, March 2020.