Supply-side structural reform in the financial sector is an important measure to advance high-quality development of the Chinese financial industry, which is of great significance to enhancing the capability of finance in serving the real economy, improving the competitiveness of China's financial industry in the international market and achieving financial development with Chinese characteristics.
China's modern financial structure was formed after reform and opening up. With the breakthrough in the joint-stock reform of the four biggest state-owned commercial banks, the financial industry has realized rapid growth, boosting the high-speed economic development of the country. However, there are some problems hindering quality development.
The traditional financial industry, which serves traditional industries, adopts traditional methods and relies on traditional channels and products, is having a hard time surviving as it is unable to adapt to the need of innovation-driven economic development.
During the process of the Chinese financial industry to develop in a wider and deeper way, the inadequate credit rating system has become a major restraining factor. The lack of differentiated development strategies has resulted in homogeneous growth among financial institutions. The number of financial institutions has been growing rapidly, but some institutions have expanded rapidly while their practices are not up to the standard. An effective governance system is yet to be built.
China's financial market and the total value of financial assets have been expanding much faster than the GDP, leading to high and risky leverage that is affecting the stability of the financial system.
Under these circumstances, the Central Government proposed supply-side structural reform in the financial sector, which is very necessary. We understand that this reform should both serve high-quality economic development and establish a financial development path with Chinese characteristics.
Some core issues must be solved if finance is to support quality economic development in China.
The micro earnings and macro efficiency of financial institutions must be improved. This will serve as the cornerstone of a steady and powerful financial industry.
The risk pricing and risk management ability of the financial sector should be improved. Right now, the market's huge demand for financing cannot be met because financial institutions are reluctant to lend to entities whose financing needs are unconventional. If the banks are able to assess and price the risks, they will be serving the real economy more efficiently.
The competitiveness and influence of domestic financial institutions must be enhanced. As the Chinese financial market increasingly opens, the financial industry will face fiercer competition in the domestic market in addition to a more complicated international market.
When advancing supply-side structural reform in the financial sector, the following issues must be addressed.
A virtuous circle between finance and the real economy should be realized to avoid finance being distracted from its intended purpose. In recent years, the proportion of financial added value in the total GDP has been growing in China, reaching a peak of 7.8 percent, which is even higher than in developed countries like the United States, Japan and the UK. In-depth research is needed into how much of the financial added value was really necessary to serve the real economy and how much of it was inputted in unintended areas.
The allocation of loans among businesses, individuals and the government and among large, small and medium-sized enterprises should be coordinated.
The financial service capability needs to be improved to suit higher-level opening up. The scope of outbound investment made by Chinese enterprises is much wider than that of the overseas branches of Chinese financial institutions. At present, Chinese enterprises have established investment and trade relations with nearly 200 countries and regions in the world, while Chinese financial institutions have branches in only 60 countries and regions.
Supply-side structural reform in the financial sector is conducive to establishing a financial system suitable to China's economic development and market characteristics. To improve the efficiency of financial services and ensure the stability of the financial system, the government should advance the work in the following aspects:
The mission that finance must serve the real economy must be maintained. This principle must be applied to every aspect of financial reform and opening up. Financial institutions are encouraged to develop new products and innovate their service models.
A more reasonable financial structure must be formed. China's modern financial industry has a very short history, only 30 years of commercial banks and capital markets. The unique environment and conditions have brought about a financial market that is quite different from other countries and from the international market. Therefore China must establish its own unique structure.
Supervision rules must be improved. The financial market cannot develop in an orderly fashion without a sound supervision system. The primary mission for supervision is to ensure the safety and stability of the financial system. The way the supervision authorities deal with new technologies will affect the progress of innovation. Without a certain level of tolerance of new technologies, China's financial system will fall behind the progress of new technologies and then become outdated; if the supervision is too loose, chaos and risks might prevail in the financial sector.
This is an edited excerpt of an article written by Chen Weidong, head of the Institute of International Finance of Bank of China, published in Economic Information Daily
Copyedited by Rebeca Toledo
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