Deeper into Fi­nan­cial Re­form

China is re­form­ing its fi­nan­cial sec­tor to bet­ter serve the real econ­omy.

China Pictorial (English) - - Front Page - Text by Wang Chaoyang

China’s econ­omy is trans­form­ing from high-speed growth to high-qual­ity de­vel­op­ment. The fi­nan­cial sec­tor needs cor­re­spond­ing ad­just­ment. To build a mod­ern econ­omy, syn­er­getic de­vel­op­ment of the real econ­omy, sci­en­tific and tech­no­log­i­cal in­no­va­tion, mod­ern fi­nance and hu­man re­sources are re­quired. Mod­ern fi­nan­cial sys­tems are a nec­es­sary facet of any mod­ern econ­omy. To­day, China is re­form­ing its fi­nan­cial sec­tor for bet­ter de­vel­op­ment of the real econ­omy and tighter con­trol of fi­nan­cial risks.

Serv­ing the Real Econ­omy

Fi­nance is a lifeline for the real econ­omy, and the two are tightly in­ter­min­gled. Past ex­pe­ri­ence shows that if de­vel­op­ment of the fi­nan­cial in­dus­try di­verges from that of the real econ­omy in the long term and to a great ex­tent, de­vel­op­ment won’t be sus­tain­able, and the re­sult will al­ways be large ac­cu­mu­la­tions of risks that ul­ti­mately ex­plode into a cri­sis. Over the last two years, fi­nan­cial prob­lems of “dis­trac­tion from the real econ­omy,” “idle funds” and “in­ter­nal cir­cu­la­tion” have emerged in China’s econ­omy. The most out­stand­ing prob­lem is a star­tling con­trast be­tween the high-speed growth in the fi­nan­cial sec­tor and the con­trac­tion in man­u­fac­tur­ing. A large vol­ume of funds cir­cu­lat­ing within the fi­nan­cial sys­tem re­main re­luc­tant to get into the real econ­omy, which stretches the

credit chain of fi­nance to serve the real econ­omy, raises the fi­nanc­ing cost of man­u­fac­tur­ing en­ter­prises and makes fi­nan­cial ser­vices less avail­able.

To make fi­nance bet­ter serve the real econ­omy, im­prove­ments should be made in meth­ods of macro con­trol, pat­terns of fi­nan­cial ser­vices, and strate­gies for fi­nance to bet­ter ful­fil its func­tion. One ma­jor task is han­dling the re­la­tion­ship be­tween di­rect fi­nanc­ing and in­di­rect fi­nanc­ing. Di­rect fi­nanc­ing should be given greater pri­or­ity. A cou­ple of years ago, the pro­por­tion of di­rect fi­nanc­ing by non-fi­nan­cial en­ter­prises in­creased con­sid­er­ably. Di­rect fi­nanc­ing in ag­gre­gate fi­nanc­ing to the real econ­omy ac­counted for 24 per­cent in 2015 and 23.82 per­cent in 2016. In­flu­enced by changes in the fi­nan­cial mar­ket, how­ever, the pro­por­tion of di­rect fi­nanc­ing plum­meted in 2017. Bond fi­nanc­ing and non-fi­nan­cial cor­po­ra­tions’ do­mes­tic eq­uity fi­nanc­ing ac­counted for only 2.3 per­cent and 4.5 per­cent, re­spec­tively. Pro­mot­ing di­rect fi­nanc­ing aims not only to de-lever­age and lower cor­po­rate costs, but also to pro­mote in­no­va­tion-driven de­vel­op­ment. Reg­u­la­tory au­thor­i­ties have im­ple­mented new mea­sures such as re­leas­ing in­no­va­tion bonds and green bonds, urg­ing Na­tional Equities Ex­change and Quo­ta­tions (NEEQ) and Chinext to of­fer more ser­vices for emerg­ing in­dus­tries and busi­nesses, and en­act­ing reg­u­la­tions en­cour­ag­ing eq­uity in­cen­tive.

Pro­mot­ing Fi­nan­cial Reg­u­la­tion

In re­cent years, con­sid­er­able fi­nan­cial in­no­va­tions such as in­ter­net fi­nance have swept across China. Due to past re­stric­tions on reg­u­la­tion, is­sues such as loop­holes, con­flicts of in­ter­est and ar­bi­trage have been chronic and per­sis­tent. Fi­nan­cial risks in small scale have re­peat­edly bro­ken out. In re­sponse, the Fi­nan­cial Sta­bil­ity and De­vel­op­ment Com­mit­tee un­der the State Coun­cil of China was or­ga­nized in

July 2017 to strengthen plan­ning and co­or­di­na­tion of reg­u­la­tion and pro­vide in­sti­tu­tional guar­an­tee for pre­vent­ing sys­temic fi­nan­cial risks. In April 2018, the China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion was founded, end­ing the old reg­u­la­tory sys­tem com­prised of the Peo­ple’s Bank of China and three reg­u­la­tory com­mis­sions re­spec­tively for bank­ing, in­sur­ance and se­cu­ri­ties. This mea­sure has elim­i­nated con­sid­er­able con­flicts of in­ter­est in reg­u­la­tion. It is con­ducive to bet­ter pre­vent­ing and elim­i­nat­ing fi­nan­cial risks, pro­tect­ing the le­git­i­mate rights of fi­nan­cial cus­tomers and safe­guard­ing the sta­bil­ity of the fi­nan­cial sec­tor.

In the fu­ture, reg­u­la­tion on fi­nan­cial func­tion and con­duct will be high­lighted. Reg­u­la­tion on func­tion fo­cuses on the ac­tiv­i­ties of fi­nance in­stead of on fi­nan­cial in­sti­tu­tions, which means that fi­nan­cial ser­vices, re­gard­less of the form or in­sti­tu­tion pro­vid­ing them, so long as they have the same func­tion, will fol­low the same rules. Al­though names of fi­nan­cial in­sti­tu­tions vary, func­tions of those or­ga­ni­za­tions are rel­a­tively sta­ble and mainly con­sist of pay­ment and set­tle­ment, col­lect­ing money, al­lo­cat­ing re­sources across time, space and in­dus­tries, risk man­age­ment, price dis­cov­ery and re­duc­ing in­for­ma­tion asym­me­try. Con­duct reg­u­la­tion is sup­ple­men­tary fi­nan­cial reg­u­la­tion from another per­spec­tive. It fo­cuses on whether a spe­cific con­duct of an or­ga­ni­za­tion or in­di­vid­ual in­volved in fi­nan­cial ac­tiv­i­ties com­plies with the rules. In prac­tice, fac­tors such as fraud, ex­or­bi­tant in­ter­est rates, highly com­plex fi­nan­cial de­riv­a­tives, ig­no­rant and fear­less cus­tomers and lack of ef­fec­tive reg­u­la­tion all con­trib­ute to faster ac­cu­mu­la­tion of risks. Im­ple­men­ta­tion of con­duct reg­u­la­tion can greatly ease the sit­u­a­tion.

Deep­en­ing Fi­nan­cial Re­form

Presently, China’s fi­nan­cial re­form on the macro level fo­cuses on fi­nan­cial or­ga­ni­za­tions, and the goal is to im­prove the struc­ture of mod­ern fi­nan­cial en­ter­prises and cor­po­rate gov­er­nance struc­ture. Mod­ern en­ter­prise struc­ture fea­tures trans­par­ent own­er­ships, clear rights and re­spon­si­bil­i­ties, sep­a­ra­tion of gov­ern­ment func­tions from en­ter­prise man­age­ment and sci­en­tific man­age­ment, among which the prin­ci­ple of trans­par­ent own­er­ships is core. Con­se­quently, op­ti­miz­ing share­holder struc­ture in fi­nan­cial in­sti­tu­tions has be­come a fun­da­men­tal task of fi­nan­cial re­form. Typ­i­cal cor­po­rate gov­er­nance

struc­ture de­mands a sound re­la­tion­ship be­tween share­hold­ers, board of di­rec­tors, man­agers and other stake­hold­ers. It also re­quires ef­fec­tive in­cen­tive and re­straint mech­a­nisms, in­ter­nal con­trol mech­a­nisms, risk man­age­ment mech­a­nisms and ex­ter­nal su­per­vi­sion mech­a­nisms.

At the macro level, the core of fi­nan­cial re­form is stream­lin­ing in­sti­tu­tions and sys­tems in­clud­ing the in­ter­est rate lib­er­al­iza­tion mech­a­nism, the RMB ex­change rate for­ma­tion mech­a­nism and the goal and se­quence of open­ing up of the fi­nan­cial sec­tor. The re­moval of re­stric­tions on RMB de­posit rates sym­bol­ized that in­ter­est rate mar­ke­ti­za­tion has com­pleted nom­i­nally. But full in­ter­est rate lib­er­al­iza­tion needs to be built on a bench­mark in­ter­est rate mech­a­nism and an in­ter­est rate trans­mis­sion and reg­u­la­tion mech­a­nism, through which the price of funds can be de­ter­mined by the mar­ket, en­sur­ing the mar­ket plays the de­ci­sive role in al­lo­ca­tion of re­sources. Mo­men­tum for re­form is al­ways cre­ated through open­ing up, which is a core ex­pe­ri­ence of China’s de­vel­op­ment. The RMB ex­change rate for­ma­tion mech­a­nism, cap­i­tal ac­count con­vert­ibil­ity and RMB in­ter­na­tion­al­iza­tion are three ma­jor tar­gets for China’s fi­nan­cial open­ing up. What are the re­la­tions be­tween them? There is no es­tab­lished prece­dent for a big de­vel­op­ing na­tion like China. So, China needs to con­tinue its care­ful ex­plo­ration and move for­ward steadily.

Read­ers ex­pe­ri­ence au­dio pub­li­ca­tions cre­ated by Hi­malaya FM. Shang­hai Pudong Soft­ware Park In­cu­ba­tor has in­cu­bated sev­eral en­ter­prises with an es­ti­mated mar­ket value of hun­dreds of mil­lions of U. S. dol­lars in­clud­ing this au­dio pub­li­ca­tion provider. IC

Vis­i­tors in an ex­hi­bi­tion hall of Ant Fi­nan­cial in Hangzhou in south­east­ern China. On June 8, 2018, Ant Fi­nan­cial an­nounced another round of fi­nanc­ing of US$ 14 bil­lion, which will mainly be used to im­prove Ali­pay and its part­ners’ abil­ity to pro­vide in­clu­sive fi­nan­cial ser­vices for global cus­tomers and small and mi­cro busi­nesses. VCG

On April 8, 2018, the China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion was founded in Bei­jing, end­ing the old reg­u­la­tory sys­tem com­prised of the Peo­ple’s Bank of China and three reg­u­la­tory com­mis­sions re­spec­tively for bank­ing, in­sur­ance and se­cu­ri­ties. VCG

On July 12, 2017, Hu­nan GOKE Mi­cro-elec­tron­ics Joint Stock Co., Ltd. went public at Chinext of Shen­zhen Stock Ex­change. It was the 2,000th com­pany to be listed on the Shen­zhen Stock Ex­change. VCG

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