Linchpin of Financial Opening-up
Apr 08-2021
China should continue to open up the financial industry in a prudent way while aiming to strike a balance between opening and stability, said Prof. Huang Yiping in one of the NSD’s hallmark events, China Economic Observation (CEO). He’s Deputy Dean of the NSD and Director of Institute of Digital Finance at PKU.
Prof. Huang spoke on the financial industry in the context of China’s economic opening-up. The new development pattern, centering on Dual Circulation, does not entail prioritizing domestic policies at the expense of external ones. By riding the tide of globalization, the Chinese economy has been cruising at a high speed for decades. But things have taken a turn lately: not only have the leading ships, i.e., the developed countries, lost steam in their growth, some of them have also been hacking the ropes that bind the Chinese ship with them. Facing such complex situations, China has adopted Internal Circulation alongside External Circulation. Rather than seeking to decouple, the move shows China’s will to grow with other countries and even gradually step onto the center stage of global development, so as to be one of those leading ships charting the waters for other countries.
Paradoxically, good management of domestic economic issues hinges on opening up towards the rest of the world, for full self-reliance is neither workable nor efficient. Only by staying open will China continue to become an important part of the global economic circulation and pull some other countries to develop, e.g., the economic entities along the Belt and Road.
Such understandings also apply to the opening up of the financial industry, said Prof. Huang. The bigger China’s economy becomes as a proportion of the world economy, the higher the demands on its financial industry. After 40 years of financial reforms, the industry is characterized by large size, frequent government interventions, and weak regulatory oversight.
To achieve the goals in the 14th Five-Year Plan, relevant government documents have laid out systematic expositions, which can be summed up in two major goals: One, reinforce the financial industry’s support to the real economy and make the financial industry an important engine for economic growth; Two, firmly stay atop the bottom line that no systemic financial crisis would happen.
The opening up of the financial industry serves as an important channel to realize these two goals. Major areas for opening up include the financial services (with the highly expected transition from Positive List to Negative List) and capital account convertibility.
To facilitate more flexible and freer cross-border capital flows while maintaining financial stability, the opening up of the capital account is advised to following three principles. For starter, follow and respect the order of reforms; for instance, reform to RMB exchange rates is a prerequisite for the opening up of capital account. Secondly, some macro-prudent policies should be put in place, such as those restricting short-term, large cross-border capital flows. Thirdly, enact reasonable and acceptable capital account management policies, which is about bearing some efficiency loss for the sake of avoiding financial crisis.
Despite the many optimal options proffered in textbooks, in real world decision-making ample analysis must go into balancing pros and cons and calculating costs and benefits, said Prof. Huang.
