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Xiang Junyong: The "Belt and Road" and a Growing Role for the Renminbi


By Xiang Junyong, Li Xiaxi    Source: China Forex    Published: 2017-7-2

China`s economic opening has made significant progress in recent years, and this is expected to continue under the 13th Five-Year Plan (2016-2020) even as authorities search for ways to attain more balanced economic growth. The "Belt and Road" initiative – which is aimed at boosting trade and infrastructure investment in neighboring countries – is one of the programs that will help continue this drive.

The mismatch between China`s level of economic development and the international status of the renminbi is an obstacle to future economic growth and the opening of the financial sector to the outside world. Promoting the internationalization of the renminbi is therefore a critical component of the government`s efforts to enhance financial structural reform.

In fact, promoting the internationalization of the renminbi and supply side financial reform are complementary initiatives. Advances in the use of the renminbi in the global market can effectively promote economic cooperation between China and its trading partners, enhancing cross-border capital movements and providing economic efficiencies. For instance, China`s central bank has already reached agreements with the central banks of Kazakhstan, Uzbekistan and other countries covered in the “Belt and Road” on currency swaps that support the use of the renminbi in regional pricing and settlement as well as investment. This can substantially expand cross-border financial transactions and promote the development of China`s offshore renminbi market, in turn boosting the internationalization of the renminbi.

In order to sustain the drive to make the renminbi a more international currency China needs to do the following: First, it needs to improve the cross-border renminbi business and regulatory environment as well as optimize renminbi settlement of cross-border trade and cross-border direct investment as well as facilitate renminbi loans by commercial banks. Second, it needs to steadily promote the two-way opening up of the financial sector by supporting efforts to let qualified foreign institutions issue renminbi bonds in the domestic market. Similarly, authorities need to give full support to efforts to let domestic financial institutions and enterprises issue renminbi bonds offshore. Regulators also need to make it easier for qualified foreign institutional investors to invest in the domestic financial market. Third, improvements must be made to the infrastructure needed to internationalize the renminbi by improving the cross-border payment system and cross-border renminbi settlement and clearing arrangements.

Regulatory Environment

A country`s capital market development can reflect its economic level. China`s capital market is still dominated by indirect financing, or commercial bank loans, with direct financing taking a backseat role. Risks in direct financing are relatively large, with more restrictions and longer audit time and many loopholes in regulation. This creates serious obstacles for companies, particularly small and medium enterprises. Therefore, it is imperative to improve the financial environment by reducing financing thresholds, promoting transparency in private financing and implementing supply side financial reforms.

China should make full use of the “Belt and Road” strategy to expand the level of access to its domestic financial market as it accelerates capital market reforms. The “Belt and Road” initiative is an effective channel for China to encourage other countries to cooperate with it and the initiative is conducive to strengthened financial intermediation between China and other countries. The initiative should promote trade and attract international attention to infrastructure construction. At the same time it should attract domestic and foreign investment capital, particularly in the energy sector as well as for other commodities. Foreign companies, with an eye towards enhancing their influence in China, may prove to be more willing to cooperate with the Chinese companies, and this should increase demand for financing from China`s capital market. These in turn could help set the stage for reform of the domestic capital market.

If China is to create a genuinely multi-tiered capital market it needs to adapt to the requirements of greater access and transparency. It needs to improve financial supervision and give full play to the regulatory and administrative functions of the People`s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission to prevent systemic financial risks. China also needs accounting standards, regulatory rules and laws that are fully in accordance with those of international financial markets. At the same time, it should strengthen the relevant legislative system regarding the capital market to maintain adequate market order. In order to meet the financing requirements of domestic enterprises, China should develop a bond market based on qualified institutional investors and an over-the-counter market with complementary functions and uniform rules. At the same time, it is expected to enhance the level of opening up of the stock and bond markets to outside participants.

In addition, as the world`s second largest economy, China needs to improve its capital market by attracting foreign companies to list shares on the domestic equities market. Finally, it should also promote a strategic cooperation model of two-way opening up, to encourage Chinese enterprises to "go global.”

Chinese banks and other financial institutions should examine their own strengths and better understand the overall policy framework to realize this global strategy. They need to effectively enhance their own support services with a rational distribution of foreign outlets. They must enhance the coordinated use of domestic and foreign resources, and strengthen their ability to support integrated value chains that include their customers.

Green Finance

Promoting green finance is also essential to sustainable development in a new era of financial opening up. One of the core elements of sustainable development is maintaining a good global ecological environment. However, almost all countries around the world are facing a trend of environmental degradation. Therefore, in order to continue and firmly take the road of economic globalization, it should promote the flow of capital to green industries and give a boost to sustainable development.

In making financial supply side reforms, there is a need for more financial innovation. This could provide opportunities for green finance, including the issuance of green credits and the introduction of green products. Green finance is to develop China`s financial projects from a more environmentally friendly and sustainable perspective. It is particularly important to provide funds for green projects that have lengthy investment periods to enable low-carbon development.

In addition, promoting green financial development is part of China`s international responsibilities. In the cooperation model of open economic pattern, many developing countries, most of which are still in the complex ecological environment with their economic development highly depending on the resources, and their economies in the process of industrialization and urbanization. China`s construction of a "Green Silk Road" conforms to international development trends and this is consistent with the United Nations "2030 Sustainable Development Agenda".

To promote the development of green finance, there is a need for a more open business environment. In China, green finance is still in its early stages, and there is a long way to go in establishing a completely green financial system. In the face of global environmental and climate issues, no one country can act completely on its own without external help.

Therefore, China needs to strengthen cooperation with other countries in projects involving energy – particularly clean energy. In order to successfully construct a green financial system, there must be a concerted effort involving many other countries. But China can integrate the principles of green finance and green investment into its growing foreign investment portfolio. It can also fully express its commitment to this goal of development using global rules of financial governance.

Xiang Junyong is a research fellow at Chongyang Institute for Financial Studies, Renmin University of China. Li Xiaxi is a research intern at Chongyang Institute for Financial Studies, Renmin University of China.


Key Words: Belt and Road  economic opening  Renminbi  Xiang Junyong  

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