China Forex (English)
The Need for Modern Financial Governance
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.