Finance plays key role in supporting real economy
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.