Reform vital for China’s financial market to flourish
If China is to become a global powerhouse in the new era, an important indicator that cannot be bypassed is its international financial status. A great country should have an open and highly marketized financial system with integrated functions, and one that is capable of defusing risks. These factors are the essential elements that support the financial systems of the great powers. Based on this standard, China’s entire financial market will have to carry out structural reforms and adjustments to realize its full development.
First of all, China’s Company Law and Securities Law need to be modified. The Securities Law has made significant contributions to the regulation and development of China’s capital market. However, due to the rapid changes in China’s economic structure, the slow revision of the law prompted a number of companies to seek listings overseas, including Alibaba and Tencent.
Recently, the Hong Kong Stock Exchange adjusted its listing guidelines. Its corporate governance structure failed to meet Alibaba’s IPO standards, so they made necessary amendments to it. However, similar amendments will not work in the Chinese mainland. Such cases must be profoundly understood so that we can build China’s capital market into a wealth management center and a key global market.
Second, we must promote structural reforms in the capital market. We sometimes narrowly regard the capital market only as the stock market. In fact, a complete capital market must also have a well-developed bond market. The bond market in China is very large currently. By December 2017, China’s bond market was worth 72 trillion yuan ($11.2 trillion), somewhat larger than that of the stock market. There are also various options in our bond market, including State bonds, local government bonds, financial bonds and corporate bonds. The most important issue is that China’s local government bonds have been developing too rapidly over the past few years, while corporate bonds are too complex to be traded easily. Market segmentation is of considerable importance here. China’s bond market is dominated by the central bank and the interbank market is not completely open. To realize bond market integration, developing the bond market so that it is not merely a mechanism for the adjustment of bank positions and allowing it to become a mechanism for social wealth management will require the opening up of the inter-bank market.
The third problem is credit ratings. China has three major credit rating agencies, but the system is far from sound. In terms of the indicators that are used, they are not much different from those used by the major US rating agencies. But the core of China’s assessment mechanism is imperfect, partly because its own interests have too close a relationship with the companies or financial products being assessed.
Fourth, we have a problem with the market supervision system. The system is dominated by five or six departments, and this is unfavorable for the development of the entire capital market and bond market. While amending the Securities Law, a regulatory standard should be made. Who should approve and regulate securitized financial products? According to our current regulations, the supervision goes to the institutions who also give the approval. This seems simple but is actually backward. The number of supervision institutions is seriously hindering the integration of our market. The regulatory body should be designed in accordance with the nature of the product.
Therefore, if we conduct sound reform of the bond market and of the issuance standards in the capital market, it will be a big step toward the goal of building an international financial center.