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China’s financial sector will open further with more flexibility and more cross-border use of the yuan, says China’s central bank governor. But according to experts, more reforms are needed to guarantee the sector’s continued opening up

By NewsChina Updated Jan.1

China is showing its determination to further open its financial sector with continued market-oriented and legal reforms for international business amid growing global uncertainties .  

The country’s next steps involve the full implementation of the “pre-establishment national treatment plus negative list,” flexibility of yuan exchange rates and the cross-border usage of the yuan, Yi Gang, governor of China’s central bank the People’s Bank of China (PBoC), said via video link at the second Bund Summit in Shanghai. The summit was hosted by the China Finance 40 Forum (CF40), a platform for finance policy research and exchange, and Shanghai’s Huangpu District government in late October.  

“Pre-establishment national treatment” means that foreign investors will be granted equal treatment as their Chinese counterparts during the initial stages of investment, while the negative list reduces restrictions on foreign investments, granting them further access in key industries. 

Zhu Jun, director general of the PBoC’s international division, said at the summit that the government will play a more active role in the internationalization of the yuan while the process will remain market-oriented. The government could further smooth the road to yuan-denominated cross-border trade and payments and remove other existing obstacles with more reforms, Zhu said.  

Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC) said at the summit that more channels and products will open to foreign investors, and the CSRC will continue to improve the business environment to provide a level playing field for domestic and foreign financial institutions.  

Despite China’s frequent moves to open its financial sector over the past two years, “foreign-invested financial institutions still face many problems in doing business and are calling for a more open environment,” Yi said. After the sector opens up, other reforms, including supervision, should catch up to ensure that the newly achieved openness meets expectations, economists said at the summit. 

Meeting Demand
Ever since foreign financial institutions began entering the Chinese market following its reform and opening-up in 1978, financial openness has been a perennial topic. However, the process has sped up in recent years. At the Boao Forum held in South China’s Hainan Province in April 2018, Chinese President Xi Jinping announced that China would ease restrictions on foreign financial institutions. Since then, the country has taken over 50 measures to open the financial sector, such as removing shareholder limits on foreign investment, expanding the business scope for foreign financial institutions and removing investment limits for foreign investors in the securities market.  

“The negative list [2020] for entry to the financial sector has been officially cleared,” Chen Yulu, deputy central bank governor, said at the China International Finance Annual Forum 2020 held in Beijing in September. 

“Opening the financial sector not only brings in institutions, businesses and products, but also stimulates improvements at the institutional level. It helps improve the financial sector’s capability and efficiency to serve the real economy,” Yi said at the Bund Summit.  

Xu Qiyuan, a research fellow at the Chinese Academy of Social Sciences and director of CF40’s research department, told NewsChina that China should urgently speed up financial openness while conditions permit. Xu said that while there are signs of decoupling in many fields amid Sino-US tensions, the financial sector is among the fewthat are reinforcing association. “Spurring financial openness will help China mitigate the risks of decoupling under these special circumstances,” Xu said. 

Xu added that China’s current financial system is not completely in step with real economic development as its industrial upgrades are ongoing. In particular, new service industries lack the collateral for loans, and developing their technologies and business modes usually comes with high risk. The bank-dominated financial system is not able to fully meet the demands of this transformational period. “In this situation, China not only needs supply-side reforms in the financial sector but also foreign financial institutions to wield their competitive edges, like in equity investment, to help boost the transformation and innovation of the Chinese economy,” Xu said.  

China has brought the coronavirus pandemic under control earlier than most countries and managed to maintain steady growth, Xu said. China also maintained a normal monetary policy to stabilize the yuan’s exchange rate for the short and mid-term, and the country’s reform and opening-up policies in the financial sector have won international recognition.  

In September, global multi-asset index provider FTSE Russell announced it would add Chinese government bonds to its World Government Bond Index (WGBI) from October 2021. Before that, Chinese bonds were included in the Bloomberg Barclays Global Aggregate Index (BGAI) and J.P. Morgan’s Government Bond Index-Emerging Markets (GBI-EM). This will make the Chinese market more appealing to foreign institutions, Xu said. 

Meeting Expectations
In 2019, there were 975 branches of foreign-funded banks in China from 55 countries and regions with assets totalling 3.48 trillion yuan (US$525.9b), according to a report on foreign-funded banks in China published in September by the China Banking Association, a non-profit watchdog for China’s banking sector. 

Many foreign financial institutions have expressed their appreciation for China’s reform measures, including the removal of some limits on foreign ownership that went into effect in April, and earlier policies that encourage free flow of foreign capital in the Chinese securities market. “We have no doubt seen efforts [from the Chinese government] to ensure equal treatment between foreign and domestic firms in the past couple of years,” said John Waldron, president and COO of the Goldman Sachs Group, via video link at the Bund Summit.  

But “there is a gap between China’s policy efforts and the matter-of-fact feelings of foreign financial institutions. Despite these opening-up measures, hurdles remain for the development of foreign institutions in China,” said Xu, who was in charge of a CF40 report released at the Bund Summit on feedback from foreign financial institutions. “They involve the institutions themselves and the current policies.” 

In 2007, foreign-funded banks accounted for about 2 percent of the total assets of China’s banking sector. In 2019, the share dropped to 1.56 percent, according to the CF40 report.  

In the report, Xu and his team conducted an anonymous survey of members of the European Union Chamber of Commerce in China, the American Chamber of Commerce in China, and the Japanese Chamber of Commerce and Industry in China. Sixty-seven percent said China has made improvements in its financial openness over the previous year, while 27 percent see no obvious improvement, and 6 percent believe openness decreased.  

The survey also shows that 60 percent believe they face as many challenges as opportunities in China, while 23 percent said there are more challenges than opportunities and 17 percent said there are more opportunities. Those interviewed also said that the recent policies were not meeting expectations. 

Jacques Ripoll, CEO of French bank Crédit Agricole Corporate & Investment Bank which first entered China in 1898, noted at the summit that lifting the foreign ownership limits on securities and financial companies is a major step for financial openness, but regulations still restrain the development of foreign banks in other aspects. “A lot of things have changed, but some progress can still be made,” Ripoll said at the Bund Summit over video link. 

Visitors walk past displays of foreign-funded banks at the second China International Import Expo, Shanghai, November 7, 2019

Reforms to Come
Despite the challenges facing globalization, China’s market will remain appealing to foreign financial institutions given its size and potential and the government’s persistent opening-up efforts, Xu said.  

However, he pointed out the necessity of distinguishing between opening the financial service sector, the benefits of which are widely acknowledged, and opening up China’s capital account (or liberalization of cross-border capital flows), which remains controversial. “To do the latter, China first needs to do a good job in reinforcing property rights protection and further push forward market-oriented reforms, particularly for interest rates and exchange rates,” Xu said.  

Xu noted that it is becoming more urgent that China promote cross-border usage of the yuan amid Sino-US tensions. Meanwhile, the present weakness of the US dollar presents a good opportunity for China to make financial reforms and open up its capital account. “But China should think in the long-term, fully consider the risks of opening up its capital account and push it forward in an orderly and prudent fashion,” Xu said.  

Xu said the current reform and opening-up measures only provide market access for foreign financial institutions to enter China, where financial markets and regulation are not yet mature, making it difficult for them to adapt. “Financial openness and reforms must go hand in hand. After the opening-up enters a certain phase, it demands more financial reform. Only when the financial reforms are in place could the full potential of opening be realized,” Xu said.  

“The markets for banking, insurance and securities have all been opened. Now the financial system faces more reform challenges,” said Zhu Jun, adding that such reforms will involve reducing limits on cross-border flows of capital, increasing the share of foreign financial institutions in the financial market and deciding on the adoption of more international regulatory standards. “This will involve not only financial operations in China but also improvements in accounting standards, auditing standards, the legal framework and the overall industry,” Zhu said.