Fi­nance plays key role in sup­port­ing real econ­omy

China Daily European Weekly - - Comment - Liu Qiao, dean of the Guanghua School of Man­age­ment at Pek­ing Univer­sity Li Xiaopeng, Party sec­re­tary and chair­man of China Ever­bright Group

nec­es­sar­ily mean the more the bet­ter, al­though higher lev­els of fi­nanc­ing are needed.

One in­di­ca­tor of good fi­nanc­ing is re­duced fi­nanc­ing costs. In the United States, for ex­am­ple, the av­er­age cost of gen­er­at­ing fi­nan­cial as­sets is 1.5 per­cent to 3 per­cent, but in China it is 3 per­cent or higher based on our study.

Sec­ond, in the four decades of re­form and open­ing-up, count­less en­ter­prises have emerged, but many of them have not per­formed well in terms of re­turn on cap­i­tal, which is a yard­stick to mea­sure value cre­ation or value added.

In the past two decades, the av­er­age re­turn on cap­i­tal of China’s A-share listed com­pa­nies has been only 3 per­cent, which is not good enough. As a re­sult, the lever­age ra­tio has been rel­a­tively high, and cap­i­tal has failed to flow from sec­tors with low re­turn to sec­tors with high re­turn. In­stead, the flow has been in the other di­rec­tion.

In this con­text, FHGs can be ex­pected to make fi­nan­cial in­no­va­tions to shift cap­i­tal to sec­tors and en­ter­prises with high re­turn — a much-needed change for high-qual­ity de­vel­op­ment at the mi­cro level.

Third, China’s eco­nomic mo­men­tum has changed. Ac­cord­ing to our es­ti­mates, if China main­tains a 5.5 per­cent eco­nomic growth from 2020 on­ward, by 2030 its ac­tual GDP could reach 160 tril­lion yuan ($23 tril­lion; 20 tril­lion eu­ros; £18 tril­lion ) ac­cord­ing to cur­rent price rates. Its fi­nan­cial as­set scale is ex­pected to be four times (com­pared with 3.7 times now) the vol­ume of GDP, or 600 tril­lion to 700 tril­lion yuan, by 2030.

Ac­cord­ing to our study, by 2035 China’s per capita GDP is ex­pected to reach $35,000 based on pur­chas­ing power par­ity. Ac­cord­ingly, Chi­nese con­sump­tion de­mand will change, with higher de­mand for high-end ser­vices, in med­i­cal treat­ment as well as health and food safety, which in part will fuel the na­tional econ­omy.

This year marks the 40th an­niver­sary of re­form and open­ing-up, which among other things has gifted us with fi­nan­cial hold­ing groups, which now need healthy de­vel­op­ment.

The core func­tion of an FHGs is to strike the right bal­ance be­tween risk and ef­fi­ciency. Statis­tics show that a big, com­pre­hen­sive FHG has greater risk re­sis­tance ca­pac­ity than a sin­gle fi­nan­cial or­ga­ni­za­tion; this was proved dur­ing the global fi­nan­cial cri­sis. Still, its ef­fi­ciency may de­cline and risk in­crease if it sim­ply pur­sues in­creas­ing its scale with an ag­gres­sive de­vel­op­ment strat­egy.

China’s FHGs have de­vel­oped rapidly over the past few years and made great con­tri­bu­tions to the de­vel­op­ment of the real econ­omy. But while do­ing so, they have also re­vealed many of their problems.

Begin­ning this year, reg­u­la­tors in­clud­ing the Peo­ple’s Bank of China and the China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion are deal­ing strictly with FHG vi­o­la­tions. The reg­u­la­tors have, to a large ex­tent, curbed FHGs’ blind ex­pan­sion and il­le­gal be­hav­ior, which has helped elim­i­nate many of the hid­den risks and thus pro­moted the healthy de­vel­op­ment of the fi­nan­cial sec­tor.

The China Fi­nan­cial Sta­bil­ity Re­port 2018, is­sued by the cen­tral bank re­cently, has laid out the reg­u­la­tory ideals for FHGs, which will not only help im­ple­ment all-around, con­tin­u­ous and tar­geted reg­u­la­tions, but also es­tab­lish an over­all reg­u­la­tion plan­ning sys­tem for FHGs.

Ac­cord­ing to the re­port, the key points for the reg­u­la­tor in the next stage will in­clude mak­ing clear the mar­ket ac­cess reg­u­la­tion, strength­en­ing reg­u­la­tion of cap­i­tal ad­e­quacy ra­tio and en­hanc­ing the over­all risk control of fi­nan­cial hold­ing groups.

More­over, en­act­ing and im­ple­ment­ing reg­u­la­tions for FHGs will en­sure that they fol­low the law dur­ing their de­vel­op­ment process, bet­ter serve the real econ­omy, help im­prove the mod­ern fi­nan­cial sys­tem and com­pany gov­er­nance, and pre­vent sys­temic fi­nan­cial risks. And as a spe­cial com­pany man­age­ment model, FHGs should be sub­ject to li­cens­ing.

Since FHGs are like fi­nan­cial depart­ment stores that can meet di­ver­si­fied de­mands dur­ing the pe­riod of high-qual­ity eco­nomic de­vel­op­ment, they should put their ad­van­tages of com­pre­hen­sive op­er­a­tion to good use by sup­port­ing the real econ­omy, es­pe­cially the pri­vate econ­omy, and pro­mot­ing China’s high-qual­ity eco­nomic growth.

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