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Prof. Huang Yiping Calls for Making Clear Distinctions among Controls, Supervision, and Market

Sep 11-2023   



For the financial system to progress in conjunction with the new economic development stage, it must work on improving efficiency while simultaneously reining in risks, said Prof. Huang Yiping of the NSD in a recent symposium by the research arm of China Construction Bank and Chongyang Institute of Financial Studies at Renmin University of China. Doing both entails strengthening regulatory supervision, said Prof. Huang, who emphasized the need to clearly define the different functions of macro controls, financial supervision, and market mechanism.

 

Compared with the financial systems in other countries, China’s has four salient characteristics: enormous scale, fairly high degree of interventions and controls (chiefly resulting from the dual-track reform strategy), rather weak regulatory supervision, and dominant role of banks. As the Chinese economy moves into a new development stage, a number of new factors need to be considered. For one, rising revenues and new cost bases mean that the country should learn to transition from low-cost-input growth to innovation-driven one. Another is the ramifications of a reversal in globalization, typified by the US policy of ‘Small Courtyard and High Fence’. Yet another challenge emanates from a shift in population structure, which has lost population dividends and embraced aging. Prof. Huang believed that though export remains important, consumption, investment, and innovation in particular are becoming increasingly critical. Therefore, the financial system has to bid farewell to extensive growth and undergo reforms and adjustments in order to support high-quality economic growth.

 

Prof. Huang identified two major problems besetting China’s financial system. One is its weakening support to the real economy. According to various calculations, the rate of capital return dropped from about 10% in the first decade of the century to around 5% in the second decade. He also noted that labor has been flowing to areas of higher efficiency, but capital allocation efficiency has been in decline. The other problem concerns rising risks in the financial system. China has avoided systemic financial crisis over the last 20 to 30 years, largely due to continuously strong growth and the government’s backstop role. However, every year since 2015 has seen the appearance of certain risky events. A check of the so-called ‘financial risk triangle’ would reveal that the risk level has gone up.

 

According to Prof. Huang, financial reforms can focus on three areas: regulatory supervision, innovation, and marketized reforms. He said that regulatory supervision should first and foremost aim to maintain market order and shouldn’t be saddled with other goals such as supporting the development of a particular industry or stabilizing the macro-economy. He advised narrowing down the regulatory scope and clearly defining goals centering on the safeguard of fair competition, consumer interests, financial stability, and national security. He also proposed putting in an accountability mechanism.

 

In terms of innovation, he called for more efforts to develop the capital market and increase the heft of direct financing in the overall system. Banks probably will continue to be the most important financial department, and they can improve their operations by using big data to undergird credit risk assessment. As for marketized reforms, Prof. Huang stressed the importance of not confounding supervision and controls. The former means reining in risks and regulating behaviors. Marketized reforms have played a major role in unleashing financial efficiency over the past decades. At the core is the imperative to give fair treatment to SOES and private firms, the latter being a contributor of 70% of China’s innovations.

Prof. Huang Yiping Calls for Making Clear Distinctions among Controls, Supervision, and Market

Sep 11-2023   



For the financial system to progress in conjunction with the new economic development stage, it must work on improving efficiency while simultaneously reining in risks, said Prof. Huang Yiping of the NSD in a recent symposium by the research arm of China Construction Bank and Chongyang Institute of Financial Studies at Renmin University of China. Doing both entails strengthening regulatory supervision, said Prof. Huang, who emphasized the need to clearly define the different functions of macro controls, financial supervision, and market mechanism.

 

Compared with the financial systems in other countries, China’s has four salient characteristics: enormous scale, fairly high degree of interventions and controls (chiefly resulting from the dual-track reform strategy), rather weak regulatory supervision, and dominant role of banks. As the Chinese economy moves into a new development stage, a number of new factors need to be considered. For one, rising revenues and new cost bases mean that the country should learn to transition from low-cost-input growth to innovation-driven one. Another is the ramifications of a reversal in globalization, typified by the US policy of ‘Small Courtyard and High Fence’. Yet another challenge emanates from a shift in population structure, which has lost population dividends and embraced aging. Prof. Huang believed that though export remains important, consumption, investment, and innovation in particular are becoming increasingly critical. Therefore, the financial system has to bid farewell to extensive growth and undergo reforms and adjustments in order to support high-quality economic growth.

 

Prof. Huang identified two major problems besetting China’s financial system. One is its weakening support to the real economy. According to various calculations, the rate of capital return dropped from about 10% in the first decade of the century to around 5% in the second decade. He also noted that labor has been flowing to areas of higher efficiency, but capital allocation efficiency has been in decline. The other problem concerns rising risks in the financial system. China has avoided systemic financial crisis over the last 20 to 30 years, largely due to continuously strong growth and the government’s backstop role. However, every year since 2015 has seen the appearance of certain risky events. A check of the so-called ‘financial risk triangle’ would reveal that the risk level has gone up.

 

According to Prof. Huang, financial reforms can focus on three areas: regulatory supervision, innovation, and marketized reforms. He said that regulatory supervision should first and foremost aim to maintain market order and shouldn’t be saddled with other goals such as supporting the development of a particular industry or stabilizing the macro-economy. He advised narrowing down the regulatory scope and clearly defining goals centering on the safeguard of fair competition, consumer interests, financial stability, and national security. He also proposed putting in an accountability mechanism.

 

In terms of innovation, he called for more efforts to develop the capital market and increase the heft of direct financing in the overall system. Banks probably will continue to be the most important financial department, and they can improve their operations by using big data to undergird credit risk assessment. As for marketized reforms, Prof. Huang stressed the importance of not confounding supervision and controls. The former means reining in risks and regulating behaviors. Marketized reforms have played a major role in unleashing financial efficiency over the past decades. At the core is the imperative to give fair treatment to SOES and private firms, the latter being a contributor of 70% of China’s innovations.