New round of financial opening can be second WTO entry

By Shen Jianguang Source:Global Times Published: 2018/4/23 23:03:39

Illustration: Luo Xuan/GT


In his keynote speech at the Boao Forum for Asia (BFA) earlier this month, President Xi Jinping announced that China will launch landmark measures this year to significantly broaden access to its markets.

China will accelerate the opening-up of the insurance industry, ease restrictions on the establishment of foreign financial institutions and expand their business scope, and open up more areas of cooperation between Chinese and foreign financial markets, he said, according to the Xinhua News Agency.

Yi Gang, China's newly appointed central bank governor, stated at the forum that measures to open up the financial sector would be put into place within months. These steps include foreign ownership limits, the two stock connects linking Hong Kong and the bourses in Shanghai and Shenzhen and the yuan's internationalization. This apparently shows the central banker's robust confidence and strong ability to get things done.

This round of financial opening is a trailblazer of a new tide of reform and opening-up in China, and the measures announced at the BFA are equivalent to admitting the country to the WTO for a second time.

Among China's reforms, those in the financial sector have always been shown to proceed relatively fast and bear more fruit. Over the past four decades, China has made impressive achievements in financial reforms and built up experience with averting financial risks.

In specific terms, the country has made substantial headway in moving toward market-oriented exchange and interest rates and opening up its capital account. Reforms of the financial regulatory system have taken further steps forward. As part of a major government reshuffle, China merged its banking and insurance regulators and strengthened the central bank's role in macro-prudential management.

These moves, which indicate that efforts to coordinate financial oversight have advanced, followed plans proposed last year for the establishment of a financial stability and development committee under the State Council.

However, in contrast to domestic reforms, the country has comparatively lagged behind in opening its financial sector to the world over the past 40 years. This year marks the 40th anniversary of reform and opening-up, and the acceleration of financial opening is considered of pivotal importance for China's economic reforms.

For financial opening to have a pioneering role in further economic reforms, there are several issues to consider.

First, pre-establishment national treatment is still supposed to coexist with a negative list. The opening of the financial sector needs to act in concert with reforms of the yuan's exchange rate formation regime and the road map toward capital-account convertibility.

Second, foreign ownership limits in the financial sector should be eased further. For instance, caps on foreign investment in banks and financial asset management firms could be lifted and foreign investors could be allowed to take 51-percent stakes in brokerages and fund management firms.

Third, foreign investors should be treated equally with their domestic counterparts, which will give foreign investors greater opportunities in the Chinese market.

Fourth, bigger steps must be taken to push for capital-account opening and the yuan's internationalization, such as increasing trading quotas under the stock links connecting exchanges in the Chinese mainland and Hong Kong.

Certainly, there is concern that a broad opening of the financial sector will be negative for domestic financial businesses. But actually, more  competition in the financial sector will prompt domestic financial firms to focus clearly on operational efficiency and corporate governance.

Since China's financial sector has built up a considerable base of sticky customers, local financial institutions are likely to stay competitive. Additionally, financial opening is unlikely to be accomplished overnight:  For instance, foreign ownership limits in domestic securities firms won't be removed for three more years, which will allow a sufficient transition period. Further, the assets of foreign-funded banks as a percentage of the total assets of financial institutions in China has been falling since 2007 and now stands at just 1.3 percent. During the same period, domestic financial firms substantially improved their competitiveness.

Accelerated financial opening is merely a small part of the new round of reform and opening-up. But the reform pledges made by the Chinese leadership at the BFA, which aim for higher-level opening-up of the economy, are equivalent to ushering in a second WTO entry.

The author is managing director and chief economist with Mizuho Securities Asia.

Posted in: INSIDER'S EYE

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