What's Next for Fi­nan­cial Open­ing Up?

China’s fi­nan­cial open­ing up over the past four decades has cre­ated valu­able ex­pe­ri­ence and lessons for im­ple­ment­ing fi­nan­cial poli­cies in the next phase.

China Pictorial (English) - - Contents - Text by Huang Yip­ing

In the early 1990s, China’s fi­nan­cial sys­tem cov­er­ing com­mer­cial banks, in­sur­ance com­pa­nies and cap­i­tal mar­kets be­gan to take shape af­ter re­con­struc­tion across a decade since 1978, when the fi­nan­cial sec­tor was in ruins.

Fol­low­ing the rapid de­vel­op­ment of the fi­nan­cial mar­ket, China launched two ma­jor mea­sures on fi­nan­cial open­ing up: First, it adopted a pol­icy to wel­come for­eign di­rect in­vest­ment in 1993, which ul­ti­mately made China the big­gest bene­fac­tor of for­eign di­rect in­vest­ment over the sub­se­quent two decades. Sec­ond, the com­bi­na­tion of the dual ex­change rate in 1994 marked the launch­ing of a sys­tem of man­aged float­ing ex­change rates.

Dur­ing the sec­ond half of 1996, Dai Xian­g­long, then gover­nor of the Peo­ple’s Bank of China, wrote to the In­ter­na­tional Mon­e­tary Fund ( IMF) that China had re­al­ized RMB con­vert­ibil­ity on its cur­rent ac­count and planned to re­al­ize con­vert­ibil­ity on cap­i­tal ac­count nt in next five to ten years.

The fi­nan­cial cri­sis in East Asia in 1997 post­poned China’s plans ns to open up the cap­i­tal ac­count, but the open­ing up of China’s fi­nan­cial ncial sec­tor did not stop. At the end of 2001, China joined the World Trade Or­ga­ni­za­tion and clearly pledged ed to open up its fi­nan­cial ser­vice sec­tor. ctor. China’s econ­omy has en­joyed ro­bust growth since then. Al­though ough the coun­try’s ex­ports in­creased d and for­eign ex­change re­serves

ac­cu­mu­lated fast, China’s fi­nan­cial sec­tor en­dured fierce global com­pe­ti­tion.

On Jan­uary 1, 2004, Cen­tral Hui­jin In­vest­ment Ltd. was es­tab­lished to ex­e­cute the power and ful­fill the obli­ga­tion of an in­vestor on be­half of the govern­ment for ma­jor state- owned fi­nan­cial en­ter­prises, which ev­i­denced that re­form had in­flu­enced all types of fi­nan­cial in­sti­tu­tions. This re­form con­tin­ued all the way to 2012, when China Ever­bright Bank went pub­lic in China. This round of re­forms has led Chi­nese fi­nan­cial in­sti­tu­tions oper­at­ing at their own risk and shoul­der­ing re­spon­si­bil­ity for their own prof­its or losses. They have im­proved sig­nif­i­cantly in busi­ness phi­los­o­phy, op­er­a­tion modes, cap­i­tal ad­e­quacy ra­tio, and risk man­age­ment.

The fi­nan­cial cri­sis of 2008 ac­cel­er­ated China’s progress on in­ter­est rate lib­er­al­iza­tion and RMB glob­al­iza­tion. As the RMB’S pro­por­tion steadily in­creased in global pay­ment and re­serve, it was in­cluded in the new Spe­cial Draw­ing Right ( SDR) bas­ket of the IMF, man­i­fest­ing the RMB’S ar­rival as one of the ma­jor re­serve cur­ren­cies in the world. RMB glob­al­iza­tion has made new con­tri­bu­tions to the re­form of the in­ter­na­tional mon­e­tary sys­tem and will lead the in­te­gra­tion of China’s fi­nan­cial sec­tor with that of the world.

China has been pro­gress­ing in re­form and open­ing up for four decades. Its fi­nan­cial open­ing up has made re­mark­able achieve­ments based on macro in­di­ca­tors. The huge in­flow of for­eign di­rect in­vest­ment has made sig­nif­i­cant con­tri­bu­tion to China’s ex­ports and eco­nomic growth. Ad­di­tion­ally, China’s rel­a­tively sta­ble fi­nan­cial sys­tem and sound in­ter­na­tional bal­ance of pay­ments have boosted the con­fi­dence of in­vestors. The open­ing up of China’s fi­nan­cial sec­tor has taken place along­side the dra­matic changes in the coun­try over the four decades of re­form and open­ing up. It of­fers valu­able ex­pe­ri­ence and lessons for im­ple­ment­ing fi­nan­cial poli­cies in the next phase. Mean­while, it may also serve as ref­er­ences for other emerg­ing economies that are open­ing up.

First of all, China needs to make the right choice on the se­quence of re­form poli­cies. It is uni­ver­sally agreed that the se­quence of mea­sures is im­por­tant for fi­nan­cial re­form. With­out sound re­form poli­cies, open­ing up can gen­er­ate risks. There­fore, China should com­bine mea­sures to pro­mote re­form through open­ing up and those fa­cil­i­tat­ing open­ing up through re­form. Cross- bor­der cap­i­tal flows should not be fur­ther un­leashed un­til the lib­er­al­iza­tion of in­ter­est rates is fin­ished and the flex­i­bil­ity of ex­change rates sig­nif­i­cantly im­proves.

Sec­ond, the trial open­ing up of the fi­nan­cial ser­vice sec­tor can be launched. The open­ing up of fi­nan­cial ser­vices doesn’t in­volve ma­jor flow of cap­i­tal and is still reg­u­lated do­mes­ti­cally, so it has low risk. At the same time, par­tic­i­pa­tion of for­eign-funded fi­nan­cial in­sti­tu­tions will cre­ate more com­pe­ti­tions and im­prove the qual­ity of the in­dus­try. Those in­sti­tu­tions shall bring new op­er­a­tional tech­niques and man­age­ment. Th­ese are con­ducive to eco­nomic growth.

More­over, it is cru­cial to set a prag­matic tar­get for the open­ing up of cap­i­tal ac­counts. There has been a con­sen­sus in the in­ter­na­tional pol­icy cir­cles af­ter the Amer­i­can subprime mort­gage cri­sis that ma­jor cap­i­tal flows in a short term can cause ma­jor risks. There­fore, the IMF has also changed its poli­cies, al­low­ing re­gional and tem­po­rary lim­its by coun­tries on cross-bor­der cap­i­tal flow for the pur­pose of main­tain­ing fi­nan­cial sta­bil­ity or the in­de­pen­dence of a cur­rency. In the case of China, as it can­not with­stand the af­ter­math of fully opened cap­i­tal flow in the fore­see­able fu­ture, open­ing up at a ba­sic level is a rather prag­matic goal.

Jan­uary 27, 2016: Li Rongyuan (sec­ond from left), chief co­op­er­a­tion of­fi­cer of Union­pay In­ter­na­tional, per­forms the first trans­ac­tion in New Zealand with a Union­pay card. That day, Union­pay In­ter­na­tional and ANZ Bank ex­ec­u­tives met to an­nounce a co­op­er­a­tive project in New Zealand. All ANZ au­to­matic teller ma­chines and POS ma­chines in New Zealand would of­fer ser­vices for Union­pay cards for ac­counts be­gin­ning with the dig­its 62. Xin­hua

On Novem­ber 26, 1990, the Shang­hai Stock Ex­change was es­tab­lished, mark­ing a sig­nif­i­cant break­through in the re­form and open­ing up of China's cap­i­tal mar­ket. Since then, the growth of this in­sti­tu­tion has man­i­fested the birth and ex­pan­sion of China's cap­i­tal mar­ket. CFB

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