Pro­mote fi­nan­cial re­forms Un­bal­anced macro struc­ture has re­sulted in lack of fl ex­i­bil­ity and a high con­cen­tra­tion of risks in the bank­ing sys­tem

China Daily (Hong Kong) - - COMMENT -

China ur­gently needs to launch a new round of fi­nan­cial re­forms in re­sponse to the mount­ing sys­tem­atic risks in the coun­try’s fi­nan­cial sys­tem. Since the mi­cro­pru­den­tial re­form ap­proach of the last round of re­forms, with its em­pha­sis on cer­tain fields and fi­nan­cial in­sti­tu­tions, is un­fit for the new fea­tures and trends of the cur­rent fi­nan­cial sys­tem, the ac­cu­mu­la­tion and evo­lu­tion of sys­tem­atic risks in re­cent years is crying out for a new round of fi­nan­cial re­forms with a macro­pru­den­tial per­spec­tive to soften the im­pact of the econ­omy-wide fluc­tu­a­tions and eco­nomic re­struc­tur­ing.

China’s fi­nanc­ing sys­tem is overly re­liant on bank credit. This un­bal­anced fi­nan­cial struc­ture has re­sulted not only in a high con­cen­tra­tion of risks in the bank­ing sys­tem, but also in the fi­nan­cial sys­tem hav­ing less flex­i­bil­ity to re­sist ex­ter­nal shocks. China’s fi­nan­cial struc­ture with its ex­ces­sive de­pen­dence on in­di­rect fi­nanc­ing will not be able to meet and adapt to the var­i­ous fi­nanc­ing needs and chang­ing risks dur­ing the process of eco­nomic re­struc­tur­ing, and it is not con­ducive to the tran­si­tion of the eco­nomic growth pat­tern. The coun­try’s fi­nan­cial sys­tem is in need of re­struc­tur­ing in or­der to main­tain sta­bil­ity.

In­no­va­tion is a prom­i­nent fea­ture of the coun­try’s eco­nomic tran­si­tion, which re­quires high in­vest­ment and the ag­gre­ga­tion of a large num­ber of pro­duc­tion fac­tors and re­sources for sup­port. A nec­es­sary con­di­tion for in­no­va­tion and thus the suc­cess of the eco­nomic tran­si­tion is hav­ing a sound fi­nan­cial struc­ture and a healthy, ma­ture fi­nan­cial mar­ket, es­pe­cially a full-fledged cap­i­tal mar­ket, in place. As an im­por­tant plat­form for op­ti­miz­ing the al­lo­ca­tion of re­sources, a cul­ti­va­tion mech­a­nism for en­cour­ag­ing ven­ture cap­i­tal and screen­ing mech­a­nism to en­sure the sur­vival of the fittest, the cap­i­tal mar­ket has an ir­re­place­able role to play in pro­mot­ing in­no­va­tion de­vel­op­ment and the eco­nomic tran­si­tion.

There are two en­try points for fi­nan­cial re­struc­tur­ing. First, with re­gard to “in­cre­men­tal” fi­nanc­ing needs, China should force­fully de­velop mul­ti­level cap­i­tal mar­kets — in­clud­ing bond and stock mar­kets, ex­changes and over-the-counter mar­kets, in­crease the pro­por­tion of di­rect fi­nanc­ing and im­prove its fi­nan­cial struc­ture.

There­fore, fur­ther mar­ket-based and la­wori­ented re­forms are needed to im­prove the ef­fec­tive­ness of mar­ket’s role in al­lo­cat­ing re­sources. In ad­di­tion, dur­ing the process of eco­nomic tran­si­tion, a large num­ber of small and medium-sized en­ter­prises are thirsty for more fi­nanc­ing, which re­quires the de­vel­op­ment of mul­ti­level cap­i­tal mar­kets.

Sec­ond, with re­gard to “stock” fi­nan­cial as­sets, mainly credit as­sets, the au­thor­i­ties should ac­cel­er­ate the pilot process of as­set se­cu­ri­ti­za­tion, im­prove the rel­e­vant laws and reg­u­la­tions, and ac­cel­er­ate the re­struc­tur­ing of com­mer­cial banks so as to im­prove their abil­ity to re­sist risks. Steadily pro­mot­ing as­set se­cu­ri­ti­za­tion will be con­ducive to not only the preven­tion and su­per­vi­sion of “shadow bank­ing” risks, but also to ac­cel­er­at­ing the busi­ness re­struc­tur­ing and ad­just­ment of com­mer­cial banks in or­der to im­prove their abil­ity to serve the real econ­omy.

The de­vel­op­ment of shadow bank­ing in China is an out­come of not only the coun­try’s un­bal­anced fi­nan­cial struc­ture and ex­ces­sive fi­nan­cial reg­u­la­tions, but also fi­nan­cial in­no­va­tion and mar­ket di­ver­si­fi­ca­tion. So we can­not to­tally re­pu­di­ate the de­vel­op­ment of shadow bank­ing in China just be­cause of prob­lems emerg­ing in Western coun­tries’ shadow bank­ing sys­tems.

How­ever, be­cause of the con­gen­i­tal de­fect in the shadow bank­ing sys­tem in risk preven­tion and the lack of su­per­vi­sion, the rapid de­vel­op­ment of shadow bank­ing in China in re­cent years has re­sulted in mount­ing po­ten­tial sys­tem­atic risks. Com­pared with the ex­ces­sive in­no­va­tion and de­vel­op­ment of Western shadow bank­ing, the prob­lems in China’s shadow bank­ing sys­tem lie in in­sti­tu­tional prob­lems, such as ex­ces­sive fi­nan­cial reg­u­la­tion and the lag­ging be­hind of fi­nan­cial and le­gal frame­work re­forms.

Rel­e­vant laws and reg­u­la­tions should be es­tab­lished and im­proved to unify su­per­vi­sion rules, loosen fi­nan­cial reg­u­la­tion, nor­mal­ize shadow bank­ing ac­tiv­i­ties and defuse po­ten­tial risks. The rel­e­vant au­thor­i­ties should start fi­nan­cial leg­is­la­tion and mod­i­fi­ca­tion, fill­ing in the le­gal gaps.

China’s re­forms have lagged be­hind the de­vel­op­ment of its fi­nan­cial sys­tem, and the en­vi­ron­ment is not con­ducive to pre­vent­ing and elim­i­nat­ing fi­nan­cial risks and main­tain­ing the health and sus­tain­able de­vel­op­ment of the fi­nan­cial sys­tem. From an in­ter­na­tional per­spec­tive, in­te­grated fi­nan­cial man­age­ment has be­come the main­stream for the de­vel­op­ment of in­ter­na­tional fi­nan­cial sys­tems, and the rapid de­vel­op­ment of in­te­grated fi­nan­cial man­age­ment in China can only be achieved on the premise of re­forms and re­mod­el­ing of the fi­nan­cial reg­u­la­tory sys­tem and leg­isla­tive sys­tem. This ar­ti­cle is from a pa­per by the re­search group of the Fi­nan­cial Re­search In­sti­tute af­fil­i­ated with the De­vel­op­ment Re­search Cen­ter of the State Coun­cil. It first ap­peared in the China Eco­nomic Ob­server mag­a­zine.

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