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Financial Reform for Economic Innovation

Dec 22-2020   



How can the finance industry support innovations? In the words of John Hicks, British economist and Nobel laureate, the Industrial Revolution had to wait for a financial revolution before its productivity could materialize in the textile industry, railway transportation and shipping. The catalyst came from abundant funding at reasonable costs – the fruition of finance.

 

Prof. Huang Yiping, Deputy Dean of the NSD, thus began his speech on the role of finance in economic innovation in a seminar in Shenzhen. An ongoing debate about financial reforms laments the weakening support of the financial industry to the real economy. The fundamental reason could be that China’s economic growth has shifted from factor-input model to innovation-driven model, yet the existing financial system is yet to catch up.

 

China has successfully built up an extensive financial system over the course of market-based reforms. But the system has two salient features that are rather different from international norms. For one, it’s dominated by banks, which provide over 85% of the external financing of all firms. In stark contrast, the market only accounts for a tad over 10% of financing. For the other, the Chinese government has relatively more interventions in the financial system.

 

Despite the problems, it must be admitted that the financial system has been efficacious and made great contributions. It must also be recognized that the system might not work well for an innovation-driven economy, which carries much more uncertainties than a manufacturing one.

 

For the financial system to move forward, there are three areas to focus on. One is to change the financial structure and tilt it towards capital markets. The second area is market-based reforms, to which marketized risk pricing is the key. Only so can financial institutions truly work for medium-, small- and micro-enterprises and private firms. The last area to tackle is financial oversight. Investors must be weaned from the conviction that the government will always pick up the tabs no matter what happens. For this aim, financial oversight must be improved so that risks are identified in advance and addressed appropriately – or even fully contained.

 

Shenzhen has a good chance of becoming the world’s innovation center in the future, provided that it has a strong financial sector, said Prof. Huang. The city already offers some good practices in finance. It works on fusing online and offline financial services and is thus ahead in promoting financial inclusiveness. WeBank, China’s first internet-based private bank and headquartered in Shenzhen, relies on big data for risk management and boasts a non-performing loan ratio of just 1.24%. Shenzhen has also done a good job in combining direct and indirect financing. All kinds of investment funds thrive and support innovation activities in the city. The third laudable practice is the integration of the government and the market. The local government has been following market rules in a proactive and smart way so as to make up for some malfunctions of the market.

 

Financial Reform for Economic Innovation

Dec 22-2020   



How can the finance industry support innovations? In the words of John Hicks, British economist and Nobel laureate, the Industrial Revolution had to wait for a financial revolution before its productivity could materialize in the textile industry, railway transportation and shipping. The catalyst came from abundant funding at reasonable costs – the fruition of finance.

 

Prof. Huang Yiping, Deputy Dean of the NSD, thus began his speech on the role of finance in economic innovation in a seminar in Shenzhen. An ongoing debate about financial reforms laments the weakening support of the financial industry to the real economy. The fundamental reason could be that China’s economic growth has shifted from factor-input model to innovation-driven model, yet the existing financial system is yet to catch up.

 

China has successfully built up an extensive financial system over the course of market-based reforms. But the system has two salient features that are rather different from international norms. For one, it’s dominated by banks, which provide over 85% of the external financing of all firms. In stark contrast, the market only accounts for a tad over 10% of financing. For the other, the Chinese government has relatively more interventions in the financial system.

 

Despite the problems, it must be admitted that the financial system has been efficacious and made great contributions. It must also be recognized that the system might not work well for an innovation-driven economy, which carries much more uncertainties than a manufacturing one.

 

For the financial system to move forward, there are three areas to focus on. One is to change the financial structure and tilt it towards capital markets. The second area is market-based reforms, to which marketized risk pricing is the key. Only so can financial institutions truly work for medium-, small- and micro-enterprises and private firms. The last area to tackle is financial oversight. Investors must be weaned from the conviction that the government will always pick up the tabs no matter what happens. For this aim, financial oversight must be improved so that risks are identified in advance and addressed appropriately – or even fully contained.

 

Shenzhen has a good chance of becoming the world’s innovation center in the future, provided that it has a strong financial sector, said Prof. Huang. The city already offers some good practices in finance. It works on fusing online and offline financial services and is thus ahead in promoting financial inclusiveness. WeBank, China’s first internet-based private bank and headquartered in Shenzhen, relies on big data for risk management and boasts a non-performing loan ratio of just 1.24%. Shenzhen has also done a good job in combining direct and indirect financing. All kinds of investment funds thrive and support innovation activities in the city. The third laudable practice is the integration of the government and the market. The local government has been following market rules in a proactive and smart way so as to make up for some malfunctions of the market.