The ongoing opening-up of China’s financial market
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.”