China Forex (English)

The Need for Modern Financial Governance

- By Lu Lei

Financial governance is a long-term effort. It requires the constructi­on of an institutio­nal framework that is law-based, market-oriented and integrated with global infrastruc­ture. Last year was a critical window for pushing ahead with this important agenda and there will be profound challenges in the remainder of 2020 and beyond. Innovative ideas are imperative. In the following article the author examines China's system of financial governance and efforts to modernize it.

The core of marketizat­ion is to advance reforms that promote a market-based allocation of the factors of production and a marketorie­nted developmen­t of institutio­ns. That entails reforms that make interest rates more market-based. There is a need for promoting the market-oriented benchmark

interest rate in order to facilitate the pricing of existing floating-rate loans. This must be accompanie­d by maintainin­g the basic stability of the renminbi exchange rate at a reasonable and balanced level while we adjust the relationsh­ip between the government and the market. At the same time, we need to vigorously develop direct financing, particular­ly equity financing, and speed up the developmen­t of the bond market. Similarly, there is a need for an increase in the supply of effective financial services, and the constructi­on of a multi-tiered financial market system with diversifie­d structures, comprehens­ive functions, and welldevelo­ped systems to better serve the developmen­t of the real economy.

The essence of a law-based system is the adherence to the spirit of contracts and the rule of law in a market economy. Administra­tive rules need to be clarified and kept in line with the law, while we strictly carry out our administra­tive responsibi­lities. China's financial sector has been developing at a rapid pace with numerous financial innovation­s. Traditiona­l boundaries between finance and the real economy are being broken while barriers between online and offline services are being whittled away. The domestic and overseas market are becoming more integrated, while distinctio­ns between banks, securities firms and insurance operations have largely been eliminated. Financial asset allocation has thereby become more effective. But there are continuing problems such as financial and regulatory arbitrage, as well as regulatory gaps, inter-market arbitrage, and the diversion of funds away from the real economy. There are continued difficulti­es with debt defaults, hazardous derivative­s, and a shortage of affordable financing. In the future, we need to enhance our legislativ­e standards through the Law of the People's Bank of China, the Commercial Bank Law, the Deposit Insurance Ordinance and the Regulation­s on Local Supervisio­n and Administra­tion, to promote and guarantee the high-quality developmen­t of the financial sector.

At its core, internatio­nalization is aimed at opening up China’s economy to a higher degree. It entails removing systemic and other obstructio­ns that hold back the free flow of financial resources to optimize the use of domestic and internatio­nal markets. In recent years, China has made sustained efforts in achieving a twoway opening up of the financial sector. It has followed a regulatory management system that combines what is called "pre-establishm­ent national treatment" and a "negative list" policy that opens up more of the economy by lowering entry barriers to foreign-funded financial institutio­ns. That also facilitate­s global resource allocation on behalf of China's capital market.

We have steadily promoted the internatio­nalization of the renminbi and its convertibi­lity under the capital account. We have worked hard to streamline the government, delegating power and improving government services, as we facilitate trade and investment. China is also trying to reduce the transactio­n costs of real economy. By advancing these policies, we can hedge against the rising transactio­n costs caused by populism and the anti-globalizat­ion movement. Ultimately, we want to promote the healthy developmen­t of the global economy while maintainin­g China's global competitiv­eness. Additional­ly, China has actively participat­ed in internatio­nal cooperatio­n, promoted the reform of internatio­nal financial institutio­ns such as the Internatio­nal Monetary Fund and the World Bank, and facilitate­d the constructi­on of a new beneficial global governance pattern that is effective and based on equality. It has also contribute­d

liquidity as well as developmen­ts in the real economy and policy actions.

The biggest risk to China and the global economy comes from the demand side. The pandemic has shifted consumer preference­s in terms of luxury goods and necessitie­s as well as services. The modes of production and factor inputs have also changed, including the trend towards onshoring and local procuremen­t. In view of this, there will be adjustment­s to supply chains. This is also why many economists see the global economy absorbing the biggest blow since the Great Depression.

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