Making the right transition

Financial sector reforms key to China's growth in global financial arena

China has been dedicated to switching its economic growth model in the past few years and will continue such an effort in the coming decades. With softening international demand, increasing labor costs and intense competition from neighboring countries with even cheaper labor, the government has rolled out many policies aimed at transforming China's economic growth model so that the economy relies less on foreign demand through exports and more on domestic consumption.

While Chinese companies are paying increasing attention to domestic consumers, they have also become increasingly international. With their existing penetration in the product market, more Chinese companies are now engaging in investment and acquisition projects intended to give Chinese manufacturers greater advantage in international markets.

Chinese financial institutions, such as commercial and investment banks, have become more visible in such deals. The sovereign wealth fund (the China Investment Corporation) and policy banks - most notably China Development Bank and the Export and Import Bank of China - have also been financing and directly investing in many foreign targets.

There has been considerable global approval for the overseas expansion plans of Chinese financial institutions, and the general opinion is that the Chinese economy is undertaking the desired transition from a manufacturing to services industry. Such moves have helped Chinese companies gain an edge in overseas projects and also provide a viable financing option in the global market.

At the same time, some foreign governments have become concerned about China's rising financial clout, even as they continue to be concerned over the nation's manufacturing might. Chinese financial institutions are now facing the same global expansion problems that manufacturing companies faced some years back.

Some of the common questions include: To what extent are the Chinese sovereign wealth fund and policy banks purely commercial and to what extent are their business transactions politically motivated? Do Chinese financial institutions receive unfair subsidies when investing overseas? Can foreign companies and financial institutions gain equal and fair access to the Chinese domestic market?

These questions have become particularly sensitive given that some foreign companies and financial institutions have not managed to make significant headway in the Chinese domestic market.

So how can China increase its global economic and financial influence without causing worries and concerns in other countries?

The answers can be broadly summed up in three points.

First, further reform of the domestic financial sector. Part of the policymakers' worry about opening up the domestic financial market stems from the lessons learnt during the 1997-98 financial crisis in Southeast Asia. The government is also reluctant to open up the market further as it wants the domestic financial market to be more mature and stable. But without an open financial market, questions inevitably arise about whether Chinese banks and financial institutions are starting on an equal footing with their international competitors.

To better integrate into the global financial system, China has to complete at least two critical reforms in the financial sector. The first and foremost is the market-determined interest rate. The market-determined baseline treasury rate and the corresponding interest rate for corporate and municipal bonds will help Chinese manufacturers and financial institutions access the global financial market and the domestic market when capital flow controls are eventually lifted.

With domestic companies and investors all getting ready for the integration, China will eventually need to lift the controls on capital flow under the capital account, so that not only state-owned companies and banks but also private enterprises and households can make overseas investments. A more balanced mix between public and private sector financing will surely help foreigners better appreciate the intention of Chinese financial institutions' overseas transactions.

Increasing transparency and information disclosure is another step that needs to be taken by China. Even after the 2008 Olympics in Beijing and the 2010 World Expo in Shanghai, and with millions of tourists coming to China every year, there is still a considerable gap in the business culture between China and the West. Hence, better disclosure of the motivation, financing and integration plans by Chinese acquirers and financial institutions should help the target companies and the regulatory authorities understand the thinking behind the respective deals.

If Chinese companies, especially state-owned enterprises, can implement better disclosure information norms and also communicate with stakeholders, like most other multinational companies do, the resistance they face in overseas markets will gradually diminish. After all, communication serves as the basis for understanding.

Finally, the eventual opening up of the domestic financial markets to international investors and foreign financial institutions will not only alleviate foreigners' concerns with China's financial power, but also transform Chinese financial institutions into truly market-oriented and players in the international market. Only then will China truly become a financial superpower, a superpower that is trusted and respected by the entire world.

The author is deputy director of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University. The views do not necessarily reflect those of China Daily.

(China Daily 04/12/2013 page7)