Abstract: In his speech at the 2nd Bund Summit, PBC Governor Yi Gang pointed out that further opening up China’s financial sector is a fundamental part of forming a new development pattern. As to how to promote financial opening-up, he summarized three points: 1) fully implementing the pre-establishment national treatment and negative list system; 2) making coordinated efforts to promote financial opening-up, reform of the RMB exchange rate formation mechanism, and RMB internationalization; 3) preventing financial risks while accelerating opening-up.
I. Financial Opening-up under the New Development Pattern
The Chinese economy has shifted from rapid growth to high-quality development. President Xi Jinping's call to form a new development pattern is a strategic decision made in accordance with changes in China’s development stage, environment, and conditions. Instead of cutting China off from the rest of the world, the new development pattern emphasizes that China should further exploit both international and domestic markets and resources to achieve more robust and sustainable development.
The profound integration of China's economy into the global economic and trade system forms an important background for establishing a new development pattern. Being a significant participant in global economy and trade, China now ranks the first in terms of trade volume and second receiving foreign direct investment. It is an important hub and manufacturing center in the global value chain. During 2002-2019, the average annual contribution of the Chinese economy to global economic growth was close to 30%.
Building a higher-level open economy is an intrinsic part of establishing a new development pattern which requires better use of both domestic and international markets and resources. It demands efforts to facilitate the flow of commodities and factors, promote institutional opening, and enhance the competitiveness of China’s economic system, thereby improving the quality and efficiency of economic development. These efforts will benefit both the Chinese economy and the global economy.
Further opening up the financial industry is an inevitable requirement for building a new development pattern. Financial opening-up has not only introduced institutions, businesses, and products, increased the supply of financial factors, but also improved institutional rules and financial systems. It can enhance the efficiency and capability of financial services in serving the real economy and boost high-quality economic development.
II. Solid progresses has been made in financial opening-up
In the past two years, China has taken milestone steps in opening up its financial sector. More than 50 policies were issued with outstanding outcomes.
First, China removed the restrictions on foreign shareholding ratios in banks, securities, funds, futures, and personal insurance. Foreign financial institutions have expanded their business in China actively. Since 2018, China saw the introduction of eight foreign-controlled securities companies, two foreign-controlled fund management companies, and 20 private equity firms, as well as international rating agencies such as Standard & Poor's and Fitch.
Second, efforts have been made to expand the business scope of foreign financial institutions. For example, separate restrictions on the business scope of foreign securities companies were lifted. Foreign banks were allowed to obtain qualifications as lead underwriters of debt instruments after receiving market-based ratings; branches and subsidiaries of foreign banks were allowed to be qualified fund custodians.
Third, China has expanded the two-way opening-up of the capital market. In the first nine months of this year, foreign investors increased 719.1 billion yuan in their holdings of CIBM bonds. Recently, FTSE Russell announced its intention to include Chinese government bonds in its World Treasury Bond Index.
It should be noted that financial opening-up can benefit both China’s financial sector and foreign financial institutions. While finance is a competitive service industry, open competition can facilitate the development of China’s financial sector and improve its efficiency. While entering the Chinese market, foreign financial institutions can better share the dividends of China's economic development, and benefit from China’s reform and opening-up.
III. More efforts are needed to promote financial opening-up, and create a market-oriented, law-based and internationalized financial environment
First, China still needs to fully implement the pre-establishment national treatment and negative list system so as to promote the transformation of the concept and model of financial opening-up. Despite the rapid progress made in financial opening-up, we have also noticed, from our exchanges with foreign financial institutions and central banks, that foreign investors still have to apply for a variety of permits, and face various kinds of operational problems even after the restrictions on market access and business development were lifted. Foreign institutions still have loads of demands for further opening up the sector, showing that there is still a long way to go to apply the negative list system.
The negative list system does not contradict the requirement of licensed operation. With negative lists, foreign financial institutions still need to meet qualification requirements for market access and have to operate with a license for business development. Adopting negative lists is also in line with strengthening regulation during and after business operations. Regulatory authority can shift more resources from regulating market access to regulating operations, so as to improve regulatory efficiency.
Second, China has to make coordinated plans to promote financial opening-up, reform of the RMB exchange rate formation mechanism, and RMB internationalization. Reform of the RMB exchange rate formation mechanism should aim to make the exchange rate more flexible, so that the exchange rate can better play its role as an "automatic stabilizer" in the macro economy and international balance of payments. The internationalization of RMB must stick to the principle of being market-oriented, and regulatory authorities need to reduce restrictions on the cross-border use of RMB. Auxilliary systems should be strengthened to support the use of RMB so that market can better play its role.
Third, China must guard against financial risks while accelerating opening-up. Efforts should be made to strengthen macro-prudential management, improve the effectiveness of financial regulation, build all kinds of "firewalls", and improve the regulators’ ability to prevent and resolve major risks. Regulatory agencies should increase their capabilities to keep up with the level of financial opening-up.
Under the new situation, China will address the deficiencies in the current system, promote financial opening-up with higher standards, and provide strong support for the establishment of a new development pattern and high-quality economic development.
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