Innovative Development and Financial Reform
May 21-2024
On May 10, the 185th edition of Langrun Policy Talk had five scholars and experts speaking on China’s innovative development and financial reform.
He Xiaobei, Deputy Director of NSD Macro and Green Finance Lab, shared her analyses of the characteristics and challenges of China’s financial system. She said that China’s financial industry has achieved relatively fast growth in scale, in comparison to the relatively weak strength of the real economy. The macro-financial system is dominated by banking and features a relatively high growth in credit indexes. On the micro-level, she identified problems such as funds in idle motion and new loans taken out to pay off old ones. Meanwhile, the added value of banks expands as a result of scale, while the return rate of each asset slides. Under current policy, interest rates are insufficiently set by the market, which leads to the banking system taking on disproportionately high risks of the real economy. This might be seen as a support for economic growth in the short term, but would affect financial stability in the long run. She suggested that to achieve innovative development, it is imperative to build a resilient financial system which matches with the development of newly emerging industries and the structural transformation of the economy.
Prof. Huang Zhuo, Deputy Dean of NSD and Deputy Director of PKU Institute of Digital Finance (IDF), delivered a speech on the theme ‘Finance’s Support for Innovative Development’. He pointed out that social financing modes, typified by indirect financing, can hardly provide effective support to the financing needs of tech startups largely due to the inherent conflicts between such firms’ significant risks and commercial banks’ pursuit of capital safety and return certainty. FinTech, on the other hand, can go a long way in promoting a virtuous cycle among technology, industry, and finance, thus spurring new-quality productive forces. To unlock the potential of FinTech, he suggested creating a risk appraisal system that suits tech startups of different types and in different stages, as well as a risk-sharing mechanism for financial institutions. In addition to vigorously developing the capital market, Prof. Huang proposed learning from international experiences to develop a multi-layered FinTech system with commercial banking and venture capital investment (or private equity investment) as key segments.
Zhao Xijun, Co-Dean of China Capital Market Research Institute, Renmin University, dedicated his speech to the approaches to building an innovation- and investor-friendly capital market. He pointed out that China’s capital market tends to be associated with two issues: the performance of stock markets is not in line with economic fundamentals, and the Chinese stock markets don’t share the same trends as global counterparts. He said that the reasons lie in external environmental factors as well as the transformation process of the capital market, economic fundamentals, policies, and various risk factors identified by the Central Financial Work Conference. Accordingly, the central government has re-positioned the capital market and set higher standards, in particular specifying the optimization of financing structure and better harnessing of the capital market’s pivotal functions. To develop sound functions of the capital market, a clutch of measures has been unveiled, including enhancing the quality of publicly listed companies and strengthening opening up.
Tu Bo, NSD EMBA alumnus and author of Successful IPO, spoke on the impact of new capital market guidelines (commonly known as “New ‘State Council Nine Guidelines’”) on tier one equity investment and IPO market. He reviewed the timing and impact of the previous two sets of the ‘State Council Nine Guidelines’ and traced the distribution and quantitative trends of IPO firms over the years. Compared to historical data, the current round of IPO suspension hasn’t directly resulted in a steady rise in stock market indexes, largely due to the large number of IPO applications in 2023 and 2024 as well as some reform-worthy problems of the capital market. As such, he believed the current version of ‘State Council Nine Guidelines’ is set to resolve major and profound issues. In the context of new policies and requirements, Tu Bo offered a series of advice to companies eyeing IPOs.
Cao Yuanzheng, Chairman of BOCI Research Limited and Deputy Director of China Society of Macroeconomics (CSM), focused on the reshaping of global industrial chains and RMB internationalization. Delving into the issue of overcapacity, which is in heated discussions globally, he said that it can be attributed to the rapid development of Chinese industries such as new energy cars, to enormous shift in industrial structures, and to changes of global situations. Historically, China’s development was powered by an eco-system in which firms were bent on fast expanding their scales and relied on clear-cut business models and reproducibility, while banks were willing to give loans, governments worked on attracting investments and providing infrastructure, and consumers benefited from the process. The current shift to innovative development amounts to the migration of the entire eco-system, which might entail the transformation of large-scale industries into service ones. The matching eco-system will need to change accordingly, including docking with international innovative eco-systems. The internationalization of innovation is inseparable from the internationalization of Chinese yuan, he said. He proposed separating convertibility from capital account liquidity: achieving RMB movement first, before allowing the exchangeability between home currency and foreign currencies.
