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Wu Xiaoqiu: Forces to push forward financial reform


By Wu Xiaoqiu    Source: China Daily    Published: 2018-1-12

China`s financial sector is undergoing an important period of reform. It is irresistible, and I think there are three main elements that would push forward deep financial reform.

The most important is technology, whose influence over China`s whole financial system is unprecedented. The financial format had gone through great changes, especially after information technology and communication technology were put into the traditional financial system. Technology has caused changes in the soul and structure of the traditional finance sector and greatly uplifted its functions.

Financial technology, or fintech, helps the traditional financial sector get rid of the restrictions of space and time, which is very important. We must adjust to these changes. If China`s finance sector is to overtake that of the United States, it will definitely happen in the fintech sector, because it would be very hard in other sectors. In the future, technology will continue to play an especially important role in pushing forward China`s progress in the financial sector. For example, third-party payments have boosted the deep reform of China`s finance and its structural transitions, and have also brought changes to China`s consumption mode. Without such progress, China`s economic transition would be difficult.

Market forces are another important element for China`s financial reform. The market will ensure that the regulating mechanism of the whole financial system is established on market-oriented platforms. More important, the market forces will make China`s basic structure of the finance sector - that is, the financial asset structure - undergo huge changes. The market force could reflect on changes in the social demands. The finance sector has to satisfy diversified and market-oriented financial demands, whether they are from organizations or individuals. As people`s income has been growing, they have developed more varied, obvious and urgent demands for various financial products, especially in wealth management. With this trend, and under the boosting of market forces, inside China`s financial assets structure, the size of securitized assets will gradually grow, and its ratio will also be constantly increased.

I think that inside China`s financial system, the size of the securitized assets should be between 120 trillion yuan ($18.5 trillion; 15.4 trillion euros; £13.6 trillion) to 130 trillion yuan. It is very interesting to look into the securitized financial system structure: The stock market is more easier to understand, but the bonds market is more difficult. But we have to understand the securitized financial system structure to improve the functions of it. Figures released by the central bank in November showed that the managed balance of the bond market was about 72.4 trillion yuan. If we look into the 72.4 trillion, we can see that about 14.6 trillion was national debt, about 16.8 trillion was local government debt, about 16.4 trillion was financial bonds, about 10 trillion was corporation bonds, with the rest including short-term enterprise debt, medium-term notes, convertible debts and capital instruments.

When we evaluate the bond market, its fluidity matters a lot. But the fluidity of China`s bond market, which is a main foundation for its financial market, has certain problems because of its structural problem. China`s financial debts have developed very quickly, including policy banks` bonds, ordinary financial bonds and subordinate debt issued by business banks. But these bonds have false fluidity. The fluidity of local governments debts and national debts are also relatively bad. The figures of China`s bond market look good, but the inner structure has problems. A core part of financial reform is to increase the fluidity of the bond market, and market forces would help with that fundamentally.

The third important force that would drive China`s financial reform is international. From a global perspective, if China wants to have more influence in the world, then China`s finance playing an important role in the global financial system would be an important symbol of China being global. Compared with the influence of China`s economic power, that of its finance sector is relatively insufficient. To be candid, at present, China`s finance could hardly be considered as internationalized, whether from the perspective of RMB internationalization or from the perspective of the structure or proportion of foreign investors in the Chinese financial market.

However, China`s financial sector will definitely become more international, and in the next five years, it will make huge progress in internationalization. Recently, China`s government has decided to open up the financial sector for foreign investors by raising the limit on foreign ownership in joint venture financial companies, to 51 percent from 49 percent. And after three years, apart from commercial banks, there will be no limits on shareholding ratio of foreign investors. These are very important signals saying that in the next five years, China will make a big step in opening up the financial sector. We once thought of building Shanghai as a new international financial center by 2020, which seems quite difficult to realize at present, but we are heading in that direction and there is a lot that still needs to be done.

While technology, market and international forces will have a profound influence on China`s finance, we should also be aware of the risks that might occur during the development of China`s financial sector. Financial risks should always be taken seriously, and China has highly emphasized that its bottom line is to make sure that systemic financial risks will be prevented.

Preventing systemic financial risks is very important. Currently, there are certain risks in the financial sector in China, but we have to make sure they won`t turn into systemic risks. I think that in a big country, during its process of opening up and becoming a global financial center, its finance sector usually will come across some fluctuations or risks. A little risk is not horrible; what we need do is to prevent a big financial crisis that might bring destructive influences to our financial system.

Our next step is to establish a financial system that could effectively absorb risks and diversify risks. We need to design a financial system that has elasticity. The financial structure especially should have elasticity. Different financial assets have different ability and elasticity in fighting risks, and good elasticity could help the market quickly resume its function after the risks go away. The United States is one of the countries that has the most frequent financial crises, but its financial system`s immunity has become stronger every each risk. It shows that a country`s having the most frequent risks doesn`t mean its financial system will be easier to destroy. On the contrary - Southeast Asian countries only came across one big financial risk in 1997, but their financial structures were badly damaged.

This actually is a good enlightenment for China. I think that in the future, there might be some financial fluctuations in China, so we need to analyze which are the potential sources for future financial risks. Because financial risks are caused by economic growth, we need to understand the relation between the finance sector, and the capital structure and the growth model of the Chinese economy, which could be a big project worth working on.

The author is vice-president of Renmin University of China and director of the university`s Finance and Security Institute. 

Key Words:China   finance   reform   Wu Xiaoqiu  

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