Strengthening Financial Powerhouse Development
Finance is the lifeblood of the national economy and a vital core competitive advantage for any country; a strong financial sector ensures a strong nation. Since the reform and opening-up, China's finance has experienced tremendous development, growing from small beginnings to a multi-layered financial institution system led by the Central Financial Commission and Central Financial Work Committee, supported by large banks and financial groups alongside joint-stock and smaller banks, as well as a financial market system including the Shanghai, Shenzhen, and Beijing exchanges and regional markets. This robust financial framework has provided strong support for the healthy development of the real economy and the national economy.
As of the end of 2023, the total assets of China's banking sector reached $57.84 trillion, making it the largest in the world; the stock of total social financing stood at ¥378 trillion, with a balance of RMB loans at ¥235.48 trillion; the total market value of stocks was $10.98 trillion, ranking second globally; the bond balance was $22.29 trillion, also second in the world; and insurance premium income totaled $0.72 trillion, placing it second as well. However, alongside these achievements, we must recognize the issue of China's financial sector being large yet not strong enough, which is primarily reflected in the following aspects:
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First, indirect financing through banks predominates, leading to an imbalance in the financing structure. By the end of 2023, the balance of domestic stocks and corporate bonds held by non-financial enterprises was ¥42.54 trillion, accounting for only 11.25% of the total social financing stock, which points to a significant gap compared to developed countries where the direct financing ratio ranges from 50% to 80%, with the US standing at 80%-90%. This indicates a considerable shortfall in supporting the endogenous development of microeconomic entities.
Second, the capabilities of venture capital, private equity, and investment banks are insufficient, resulting in a lack of strength in financial markets. By December 2023, the assets under management of public funds in China reached $3.9 trillion, only 20.69% of the $18.85 trillion in mutual funds in the US by the end of June 2023. The assets managed by existing private equity funds stood at $2.91 trillion, representing just 11.62% of their American counterparts. Moreover, the total market value of China's top ten securities firms was $191.49 billion, just slightly exceeding Goldman Sachs’ alone by $65.7 billion; their revenue and net profit amounted to merely one-tenth and one-fourth, respectively, of those of the top four US investment banks.
From the perspective of the stock market, at the end of 2023, the total market value of the domestic stock market in China was $10.98 trillion, representing 10% of the global market; this is 35 percentage points lower than the US market's share as the largest economy. The combined market capitalization of seven US-listed companies—Apple, Microsoft, Amazon, META, Tesla, Google, and NVIDIA—reached $12 trillion, surpassing the total market value of China's stock market, underscoring the US's position as the world's leading economy. In terms of the securitization ratio, China's stock market’s total market value to GDP ratio was 61.71% at the end of December 2023, which is only 33.93% of the US's 181.87% and 45.15% of Japan's 136.67%. In the bond market, the balance of China's bonds stood at $22.29 trillion, a $2.9 trillion difference compared to the US at the same time. In the insurance sector, by the end of 2023, China's insurance density and depth were not only below the global average but were also only 6.3% and 5.8%, respectively, of the values seen in the US.
Thirdly, the level of financial openness remains inadequate, and improvement in this area is urgent. Presently, China's banks predominantly rely on interest margin income, with foreign banks holding a minor share of domestic business. In terms of financial market openness, while measures such as the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and increasing foreign ownership ratios have accelerated opening up, a considerable gap still exists when compared with the second-largest economy and the establishment of an international financial center. This is mainly evidenced by the low market value of foreign-held domestic stocks, insufficient panda bonds and dim sum bonds issued by foreign entities domestically, and the fact that China's financial market is still classified as an onshore market, lacking alignment with international trading systems and rules, and even trailing behind India’s stock market.
For instance, by the end of the third quarter of 2023, foreign institutions and individuals held domestic stock and bond assets amounting to ¥1.77 trillion and ¥2.18 trillion, respectively, representing only 1.97% and 1.42% of the total stock market value and bond balance, with a combined total of under 3.5%. There remains a significant gap in the internationalization of the RMB. According to the IMF's 'Currency Composition of Official Foreign Exchange Reserves' (COFER) survey, as of the third quarter of 2023, the share of reserves in US dollars and RMB held by central banks was 59.2% and 3.9%, ranking first and fifth, respectively. Swift data indicates that in December 2023, the top three currencies for global cross-border transactions were the US dollar (82.84%), Euro (7.35%), and RMB (5.07%); in the ranking of payment amounts among major currencies, the US dollar and RMB stood at 47.54% and 2.86%, respectively, placing them first and sixth.
Policy Recommendations:
First, accelerate the construction of a strong financial nation, promoting the establishment of a high-level open financial market system. In alignment with the requirements for 'six strengths' and 'six systems'—that is, possessing a powerful currency, a strong central bank, robust financial institutions, a leading international financial center, strong financial regulation, and a talented workforce—the spirit related to the construction of a financial powerhouse, as discussed in the Central Financial Work Conference, must be earnestly implemented. Focused on institutional openness, we should comprehensively advance the establishment of a modern financial system with Chinese characteristics, creating a sound, prudent financial control framework, a structurally rational financial market structure, a coordinated financial institution system, a comprehensive and effective financial regulatory system, and a diverse and specialized financial products and services schema, while steadily promoting the level of capital account convertibility, ensuring effective integration of domestic and foreign markets, and maximizing the role of Hong Kong as an international financial center. The objective is to continuously enhance financial pricing power and the allocation capability of financial resources, transforming Shanghai into an internationally competitive and influential global financial center.
First, build a powerful currency. Expedite the construction of modern financial infrastructure, including the establishment of multilateral cross-border clearing platforms such as the central bank digital currency (CBDC) bridge project based on distributed ledger technology (DLT). We should adhere to a market supply-demand-based, managed floating exchange rate regime, promoting RMB payments and investments in countries or regions along the Belt and Road, thereby enhancing cross-border participation and convenience. We aim to elevate the international influence of the RMB in payments, reserves, and investments, with a focus on accelerating the free convertibility of RMB in capital accounts and striving to position the RMB as the world’s third-largest currency following the US dollar and Euro. Secondly, build a formidable international financial center. In line with requirements for internationalization, marketization, and legal standardization, we must align with the high standards of international trade agreements regarding financial regulations, including the US 401K mechanism, promoting accounting, tax, audit, and legal compliance standards, as well as streamlining restrictive measures. It is essential to introduce tax incentives and supporting measures for the healthy development of capital markets, implement a pre-access national treatment with negative list management, and facilitate open regulations to drive high-level and high-quality openness in financial markets. Moreover, we should expedite the alignment of capital markets with international rules, allowing qualified foreign enterprises to list and raise funds in domestic markets and trade in the interbank market for panda bonds, while increasing the issuance of dim sum bonds in Hong Kong, gradually creating a dual-opening structure for onshore and offshore markets.
Third, build a robust central bank. Establish a modern central banking system, strengthening counter-cyclical and cross-cyclical macro-policy adjustments, enhancing country-specific policy forecasts, and ensuring coordination between macro-prudential policies, financial markets, and the real economy. We must organically integrate raising the direct financing ratio with strengthening financial markets while continuously improving the quality and efficiency of financial services to the real economy. Fourth, establish strong financial regulation. We should firmly grasp the concept of systemic financial risk prevention and control, balancing efficiency, openness, and security, and build an effective risk identification, early warning, and handling framework that spans institutions, markets, sectors, and borders in accordance with requirements for functional regulation, ongoing monitoring, transparent supervision, and collaborative oversight. This approach will ensure that financial regulation aligns with innovation and that the level of financial openness corresponds with regulatory capacity, progressively enhancing our ability to manage financial risks and staunchly safeguarding against systemic financial crises.
Second, accelerate the construction of strong financial institutions, fostering a robust financial institution system. Utilization of technology to empower finance, accelerating the expansion of artificial intelligence applications within the financial system, and integrating small and medium-sized investment banks with larger, more robust investment banks will be essential. We should encourage large financial institutions to establish branches overseas and participate in globalized, digitized, and intelligent financial services while developing smart investment advisory services and targeting mid-to-high-end clientele. Moreover, we need to enhance the intermediary and investment roles of investment banks, providing qualified and stable financial institutions with opportunities to operate amidst global turbulence, thereby focusing on establishing a financial institution framework with international influence and competitiveness, including leading investment banks. We should effectively advance initiatives in technology finance, green finance, pension finance, and digital finance, with a strong emphasis on AI+ financial application scenarios, supporting both technological innovation and the achievement of scientific results concurrently. Enhancing a financial service ecosystem that spans the entire lifecycle of tech firms—from inception and sustainability to growth and expansion—based on an integrated service approach involving venture capital, private equity investments, stocks, loans, bonds, and insurance, will be key to enhancing the integration of capital and intellectual property. This approach should entail harmonizing efforts across the asset side, funding side, and technical side, facilitating the transition of the 'innovation chain', 'funding chain', and 'industry chain'. Furthermore, we should intensify efforts to cultivate institutional investors, significantly develop angel investing, VC, and PE private equity funds, and gradually expand the risk investment and entrepreneurship investment institution framework, encouraging private equity funds to increase support for strategic emerging industries and enhancing the capital market's ability to serve nascent enterprises in the new economy. We need to actively pilot entrepreneurship investment initiatives with preferential policies such as a 20% tax rate on enterprise income of entrepreneurial investment firms, and facilitate services regarding manager and product registrations and information sharing. Leveraging the government's entrepreneurship investment fund and the technology achievement transformation guidance fund's leverage, we should intensify support for venture capital and increase the benefits extended to private capital, optimizing the return investment ratio, and improving the conversion rate of technological achievements. Furthermore, encouraging state-owned enterprises to establish venture capital firms and building a sound assessment and error-correcting mechanism for state-owned venture capital enterprises are crucial, ensuring that due diligence complies with legal norms and does not pursue personal gains, while allowing for fault tolerance or exemptions in relevant losses. Organizing pilot programs for state-owned venture capital management teams to invest alongside, while establishing a compensation distribution mechanism that aligns with the venture capital industry’s development and adopting market-oriented and facilitative principles to support qualified social capital in establishing investment guidance funds, angel investment funds, and enterprise entrepreneurship funds, should be pursued. We must forge a dedicated workforce of loyal, clean, responsible financial talents with an international perspective and a sound understanding of international financial operations, implementing a flexible talent introduction mechanism that accelerates the gathering of entities such as venture capital firms, securities firms, accounting firms, and law firms, particularly attracting international venture capital firms.
Third, accelerate foundational work consolidation, promoting the formation of a strong financial ecological system. Enhancing the direct financing ratio and optimizing the financing structure of market entities should be prioritized, enabling the financial market to play a decisive role in the social allocation of resources while continually improving the efficiency of capital utilization. First, we should leverage the Sci-Tech Innovation Board as a testing ground and advanced model for comprehensive implementation of the registration system to seamlessly integrate capital and technology, effectively linking the capital chain, innovation chain, industry chain, and value chain, thus enhancing the capital market’s role in promoting technological advancement. Second, we must refine the exit mechanisms for listed companies, employing mechanisms such as mergers and acquisitions, bankruptcy rehabilitation, and delisting through capital markets to eliminate obsolete, inefficient, and economically unproductive 'zombie enterprises', thereby promoting the principle of survival of the fittest among listed companies and ensuring the healthy circulation of 'blood' within capital markets. Third, we should actively encourage institutional investors such as social security funds, enterprise annuities, occupational annuities, and insurance companies to increase their equity investments significantly, diligently fostering a close alignment of 'risk-return' preferences with the high-quality development demands of the real economy, capitalizing on their professional advantages while establishing long-term assessment mechanisms for institutional investors to promote high-quality capital market growth. Fourth, advancing the development of financial derivatives must be expedited, broadening the range of financial instruments such as stocks, government bonds, corporate bonds, funds, stock index futures, and zero-carbon financial products, with a focus on creating a world-leading hub for zero-carbon finance. Fifth, elevating the quality of publicly listed companies should serve as the cornerstone for expanding and strengthening the capital market, with support for companies increasing their share buybacks and cancellations, maintaining the collective litigation system, enhancing transparency among market entities, and promoting healthy development within capital markets. Sixth, we need to establish a whistleblower incentive system for financial wrongdoing, cultivating a positive public opinion ecosystem and a uniquely Chinese financial ecological cultural system. Seventh, we should draw lessons from successful experiences in developed or developing countries, implementing a component stock index system for thriving markets in Shanghai and Shenzhen, effectively positioning China’s financial market as a compass. Eighth, we must proactively participate in the formulation of digital finance rules and standards, constructing regulatory, collaborative, and coordination mechanisms tailored to the evolving needs of international and domestic economic development, enhancing dialogue and cooperation with international financial regulatory institutions to bolster China's voice and initiative in global digital finance.
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