The on­go­ing open­ing-up of China’s fi­nan­cial mar­ket

China's Foreign Trade (English) - - Economy - By Ada Wong

2018 can be re­garded as the first year of the open­ing up of China’s fi­nan­cial mar­ket. Since the 19th CPC Na­tional Congress clearly pro­posed deep­en­ing fi­nan­cial re­forms, the pace of open­ing up to for­eign cap­i­tal in ma­jor ar­eas in­clud­ing se­cu­ri­ties, funds, banks, and in­sur­ance has been ac­cel­er­at­ing. Mean­while, the Peo­ple’s Bank of China will grad­u­ally im­ple­ment more than a dozen fi­nan­cial lib­er­al­iza­tion mea­sures within the year in or­der to ease the ac­cess of for­eign fi­nan­cial in­sti­tu­tions to ren­minbi busi­ness, and to at­tract for­eign fi­nan­cial in­sti­tu­tions to con­tinue over­weight­ing the Chi­nese mar­ket.

Open­ing up should be re­cip­ro­cal

At the re­cently held 2018 Ts­inghua PBCSF Global Fi­nance Fo­rum, Yao Yudong, Chief Econ­o­mist of Dacheng Fund Man­age­ment Co., Ltd., said that the open­ing up of fi­nan­cial in­dus­try is not an in­tim­i­dat­ing thing like “the wolves cir­cling”, but is in­stead a healthy stim­u­lus which makes “the tiger run faster”.

“I be­lieve that the open­ing up of the fi­nan­cial in­dus­try will have a ‘cat­fish ef­fect’, and our do­mes­tic fi­nan­cial in­dus­try may be more in­ter­na­tion­ally com­pet­i­tive be­cause of this (for­eign in­vest­ment). The Basel III Ac­cord has been fully im­ple­mented in the Chi­nese bank­ing in­dus­try. This is a lead­ing move in the world be­cause even the United States and the Eu­ro­pean Union haven’t im­ple­mented the Ac­cord yet. Thanks to this move, the Chi­nese bank­ing in­dus­try now has a de­creas­ing num­ber of bad debts and soar­ing profits. Let’s take a look at the de­vel­op­ment speed of China’s di­rect banks. It’s too fast for the for­eign banks to catch up to. If we fur­ther ex­pand the open­ing, it will not be a cade of ‘the wolves cir­cling’, but rather ‘the tiger will run faster’, and this will ac­cel­er­ate the in­ter­na­tion­al­iza­tion of the ren­minbi,” said Yao Yudong.

Ju Jian­dong, Direc­tor of the In­ter­na­tional Fi­nance and Eco­nom­ics Re­search Cen­ter of Ts­inghua PBCSF, said that fi­nan­cial lib­er­al­iza­tion should be bidi­rec­tional and re­cip­ro­cal. Other­wise, it is not sus­tain­able.

He be­lieves that China’s bank­ing mar­ket is suf­fi­ciently open for for­eign banks. How­ever, tak­ing the United States as an ex­am­ple, the de­vel­op­ment of Chi­nese banks in the United States is fac­ing cer­tain dif­fi­cul­ties. “It is very dif­fi­cult for our bank­ing in­sti­tu­tions to purely do non-bank­ing busi­ness in the United States. For ex­am­ple, there are 23 un­der­writ­ers deal­ing with the un­der­writ­ing process of pub­lic bonds in the US at present, none of which is Chi­nese-funded, and Chi­nese-funded in­sti­tu­tions have not yet ob­tained the rel­e­vant fi­nan­cial hold­ing qual­i­fi­ca­tions. Be­cause of this, we can’t be in­volved in se­cu­ri­ties un­der­writ­ing, bonds or in­sur­ance dis­tri­bu­tion in the pri­mary mar­ket. In con­trast to this, there are 10 Amer­i­can branches, 4 cor­po­rates, 50 out­lets, and 60 op­er­at­ing agen­cies in China. If we want to achieve re­cip­ro­cal open­ing up, the US bank­ing in­dus­try ac­tu­ally needs to be more open to China.”

Open­ing up of cap­i­tal flows should be cau­tious

Huang Yip­ing, Mon­e­tary Pol­icy Com­mit­tee (MPC) mem­ber of PBOC, be­lieves that dur­ing fu­ture re­forms and open­ing up, we must first clar­ify the open­ing up of the fi­nan­cial ser­vices in­dus­try and that of cap­i­tal flows. The for­mer should be bolder, while the lat­ter should be cau­tious. We must then dis­tin­guish be­tween long-term cap­i­tal flows and short-term ones as the main prob­lem af­ter the global fi­nan­cial cri­sis has been that the large amount of fre­quent short-term cap­i­tal flows has made it dif­fi­cult to achieve fi­nan­cial sta­bil­ity and eco­nomic growth.

Huang ex­pressed that two mea­sures should be im­ple­mented dur­ing this process: First, there should be a

se­quence to the fi­nan­cial open­ing up. Things should be done one by one, and stim­u­la­tion for open­ing up and re­form from both sides should be equally em­pha­sized. Se­cond, al­though we are now open­ing up to the out­side, macro and mi­cro su­per­vi­sion mech­a­nisms are still needed. For ex­am­ple, in­ter­na­tion­ally, the re­serve fund and the Tobin tax ex­ist be­cause we still re­quire risk mit­i­ga­tion mech­a­nisms in the open cap­i­tal mar­ket to make sure that fi­nan­cial sta­bil­ity is sup­ported as much as pos­si­ble while we are gain­ing ben­e­fits.

Mean­while, Huang said that the pur­pose of open­ing up should be the same for any coun­try: help­ing us to be more in­no­va­tive and bet­ter at con­trol­ling the risks. He pointed out that the eco­nomic and fi­nan­cial de­vel­op­ment is not at the same level as that of the United States. As an is­su­ing coun­try of a re­serve cur­rency, they don’t have the prob­lem of cur­rency mis­matches in in­ter­na­tional fi­nance, and they will not have to deal with a bal­ance of pay­ments cri­sis or a cur­rency cri­sis. “If China de­sires good fi­nan­cial de­vel­op­ment, go­ing fur­ther on open­ing up should still be the gen­eral di­rec­tion go­ing for­wards.”

Later, Huang Yip­ing stressed that, “This round of open­ing up is not en­tirely due to trade fric­tion. Of­fi­cial and non­govern­men­tal or­ga­ni­za­tions have been plan­ning how to open up China’s fi­nan­cial sec­tor for a long time.” He ex­plained that the Jing­shan Re­port which was re­leased dur­ing the China Fi­nance 40 Fo­rum early last year and the State De­part­ment’s newly in­tro­duced fi­nan­cial open­ing up pol­icy from last year were ac­tu­ally car­ried out be­fore trade fric­tion es­ca­lated, and are all fo­cused on how to fur­ther open up the fi­nan­cial sec­tor.

Fi­nan­cial in­fra­struc­ture con­struc­tion should be a fo­cus

Dur­ing the 2018 Ts­inghua PBCSF Global Fi­nance Fo­rum, the 2018 China Fi­nan­cial Pol­icy Re­port was also pub­lished. The re­port pointed out that the eco­nomic struc­ture is ir­ra­tional, the func­tional ori­en­ta­tion of the fi­nan­cial sys­tem is de­vi­ated, and the im­pact of new tech­nolo­gies on the econ­omy and fi­nance is the main source of sys­temic risks. The evo­lu­tion of mi­cro-spe­cific risks, such as fi­nan­cial chaos, has a cer­tain re­la­tion­ship with the fi­nan­cial reg­u­la­tory sys­tem. In or­der to bet­ter pre­vent and con­trol fi­nan­cial risks, it is nec­es­sary to con­tinue our ef­forts in the spheres of struc­tural re­form, sys­tem de­sign, and pol­icy prac­tice.

Li Yang, a mem­ber of the Chi­nese Academy of So­cial Sciences and Direc­tor of the Na­tional In­sti­tu­tion for Fi­nance & De­vel­op­ment, said that China’s mar­ket-ori­ented re­form of in­ter­est rates has been un­der­way for more than 20 years. This re­form is cur­rently re­garded as be­ing in the “deep­en­ing” phase. This shows how dif­fi­cult and com­plex the re­forms are and the core po­si­tion of the in­ter­est rate in the fi­nan­cial sys­tem. It could be de­scribed as “a lit­tle leak sink­ing a great ship”.

Zhu Min, Dean of Ts­inghua PBCSF and for­mer Vice Pres­i­dent of the IMF, re­viewed the achieve­ments over the past forty years and the ex­ist­ing de­fi­cien­cies in the Chi­nese fi­nan­cial in­dus­try. He il­lus­trated that China is cur­rently the se­cond largest econ­omy in the world, with the third largest fi­nan­cial mar­ket. How­ever, the fi­nan­cial glob­al­iza­tion level, reg­u­la­tory level, and busi­ness prod­ucts are still fall­ing be­hind. This is in­con­sis­tent with the eco­nomic de­mands for China to en­ter the new era and the de­mand for fi­nan­cial ser­vices, such as strong eco­nomic growth, the ex­pan­sion of the mid­dle class, in­creased wealth, and the prob­lem of pop­u­la­tion aging prob­lem. There­fore, it is in­evitable to “fully pro­mote fi­nan­cial re­forms and in­ter­na­tion­al­iza­tion of the do­mes­tic mar­ket”.

Zhu used data to ex­plain that the pro­por­tion of China’s cap­i­tal mar­ket in the world has risen from zero to to­day’s share of 11.3%. China has al­ready be­come the se­cond largest stock mar­ket and the third largest bond mar­ket in the world. Mar­ket cap­i­tal­iza­tion of listed com­pa­nies in­creased from 45% to 65% of GDP. The China’s in­sur­ance mar­ket is en­joy­ing broad de­vel­op­ment prospects. How­ever, in com­par­i­son, the de­gree of open­ing up and in­ter­na­tion­al­iza­tion of China’s fi­nan­cial mar­ket re­mains low. For in­stance, the pro­por­tion of for­eign bank as­sets de­creased from 2.32% in 2007 to 1.26%. For­eign inves- tors’ shares in the Chi­nese stock mar­ket only ac­counts for 1.15%, and 2.44% of the Chi­nese bond mar­ket. For­eign in­vest­ment ac­counts for the high­est pro­por­tion in the in­sur­ance in­dus­try, which is only 6.1%.

“The in­ter­na­tion­al­iza­tion of China’s fi­nan­cial mar­ket is se­ri­ously lag­ging be­hind.” Zhu Min ex­plained, “the core con­cept of open­ing up is to cre­ate an in­ter­na­tional fi­nan­cial mar­ket that is in line with in­ter­na­tional stan­dards. This is what we must do to­day.”

He ex­pressed that es­pe­cially now, with high lever­age and high sav­ings rates in China, a struc­tural trans­for­ma­tion is un­der­way: Chi­nese per capita in­come is ris­ing, the pro­por­tion of the ser­vice in­dus­try is in­creas­ing and that of the man­u­fac­tur­ing in­dus­try de­clin­ing. Un­der such cir­cum­stances, the fi­nan­cial in­dus­try needs to find new ways to sup­port the eco­nomic trans­for­ma­tion and fu­ture eco­nomic struc­ture. He be­lieves that the new fi­nan­cial in­dus­try open­ing up mea­sures an­nounced by Yi Gang, Gov­er­nor of the Peo­ple’s Bank of China, at the Boao Fo­rum are the only way for the fi­nan­cial in­dus­try to achieve its re­form, trans­for­ma­tion and up­grad­ing.

At the same time, he pointed out that the open­ing up of the fi­nan­cial in­dus­try re­quires new re­forms re­gard­ing mar­ket ac­cess, full re­lax­ation of fi­nan­cial ser­vices and the open­ing up of fi­nan­cial in­fra­struc­ture, such as credit clear­ing and credit rat­ings, which will pro­mote mar­ket trans­parency and fair com­pe­ti­tion. On this ba­sis, the cap­i­tal mar­ket will fur­ther pro­ceed with mea­sures such as the “Shang­hai-hong Kong Stock Con­nect”, “Shen­zhen-hong Kong Stock Con­nect” and “Shang­hai-lon­don Stock Con­nect”.

“Cur­rently, we are mainly re­ly­ing on in­di­rect fi­nanc­ing, which means there is still much room left for the im­prove­ment of cap­i­tal ef­fi­ciency. Af­ter open­ing up, we will pro­mote re­forms across the en­tire fi­nan­cial in­sti­tu­tion, and im­prove the fi­nan­cial ef­fi­ciency and that of fi­nan­cial ser­vices for the sub­stan­tial econ­omy.” Zhu Min con­tin­ued: “It is only when the fi­nan­cial mar­ket is open that a mod­ern reg­u­la­tory sys­tem can be es­tab­lished, thereby es­tab­lish­ing a healthy, ef­fec­tive, and ro­bust fi­nan­cial sys­tem.”

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