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Print Edition> Business
UPDATED: October 10, 2011 NO. 41 OCTOBER 13, 2011
Tending to Internal Pressure

Financial safety

Liu Ya, Vice President of the University of International Business and Economics

Financial safety has four aspects: financial stability, financial sovereignty, financial independence and financial innovation. Financial innovation is a double-edged sword—it is a driving force for the development of the financial industry and also a threat to the present regulation system. Before the new regulation system is established, the innovations might have enormous negative impacts on financial stability.

For China, it is imperative to keep tight control over financial risks. Financial risks may lead to insolvency of financial institutions, a banking crisis or even a deeper credit meltdown.

In addition, the country needs to safeguard its financial sovereignty. In the past decades, China has been gradually opening up its financial industry to the rest of the world. A number of foreign institutions are pouring in, and many have enjoyed a growing market presence and influence.

Once foreign financial institutions and investors dominate a country's financial industry, it will severely affect the independence of the country's financial regulation, monetary policies and even financial sovereignty. Greece, for example, is reeling from limited financial independence as its sovereign government debts were massively purchased by foreign investors.

At the international level, it is important for China to have a greater say in both the global financial system and the global financial market, and have greater pricing power in financial derivatives.

The International Monetary Fund (IMF) and the World Bank have played a leading role in the world's financial affairs. As a result, representation in the two organizations is key to a country's international financial influence.

Since the overwhelming financial crisis in 2008, China's status in the international financial system has been growing. For instance, Zhu Min has recently taken office as deputy managing director of the IMF, and Justin Lin Yifu has become senior vice president of the World Bank.

Meanwhile, during the internationalization process of the renminbi, China should take control of the pricing power of renminbi-denominated financial derivatives. Some countries like the United States and Singapore have staged offshore renminbi derivative products, but China has yet to gain any influence in the pricing of those products.

China is making stiff efforts to build an effective regulatory mechanism to guard against possible risks. But the problem is how to strengthen coordination between the four major regulators in the country's financial sector: China Securities Regulatory Commission, China Banking Regulatory Commission, China Insurance Regulatory Commission and the central bank.

In addition, China faces the task of improving the currency exchange rate regime and foreign exchange management system, in a bid to avoid external shocks and international hot money inflows.

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