Navigating challenges: China's path to a financial powerhouse

The concept of "building a financial powerhouse" was first introduced at China's central financial work conference in late October 2023, drawing significant attention. The Chinese government has acknowledged that while the country's financial sector is one of the largest in the world, it is not sufficiently serving the real economy. It has vowed to invigorate the financial sector to better facilitate the goal of achieving Chinese modernization.

As the world grapples with inflation, geopolitical tensions, climate change, and rapid technological advancements, China's financial sector is also facing unprecedented challenges and opportunities, experts agree. Striking a balance between preventing systemic financial risks and promoting financial market openness and innovation has become a pressing issue for policymakers and industry experts. At a panel discussion at the 2024 Financial Street Forum held in Beijing on Friday, experts shared insights on how China can better achieve its goals in the financial sector and the general economy.

Serving the real economy

The central financial work conference in October 2023 emphasized the need to "stick to the fundamental purpose of serving the real economy." It was stressed at the meeting that the financial sector must provide high-quality services for economic and social development. It is crucial to develop five major areas of finance: technology finance, green finance, inclusive finance, pension finance and digital finance.

Li Yang, chairman of the National Institution for Finance and Development, noted at the Financial Street Forum that the correct execution of financial functions is a central theme in the new round of Chinese financial reforms. This not only underpins the construction of a financial powerhouse but also ensures the stability and resilience of the financial system.

Li further pointed out that China's current financial system is grappling with issues such as maldistribution of funds and an irrational financing structure. The country is seeking to create a more dynamic and efficient financial sector while preventing excessive financialization that could harm the real economy.

Li concluded that while significant progress has been made, policy reforms still remain a work in progress. "China still has a long way to go to transition from a big financial country to a strong one," he said.

Addressing local government debt

Li Jianjun, vice president of the Central University of Finance and Economics, discussed the issue of local government debt.

Local governments have heavily invested in infrastructure and other areas in recent years to keep pace with the country's rapid economic growth, resulting in rising debt levels. According to the Ministry of Finance, as of the end of June 2024, the outstanding balance of local government debt nationwide reached 42.6 trillion yuan (about $6 trillion).

While acknowledging that the overall risks are manageable, Li Jianjun warned that this heavy burden could threaten the healthy development of local economies and impact the real estate market.

China has implemented various measures to address this issue, including repayment with fiscal funds, debt restructuring, asset disposal and project operations.

Li cited the liquor-making giant Kweichow Moutai Co. in less developed southwestern China’s Guizhou Province as a good example. The provincial government adopted the strategy of selling the high-flying shares of the state-owned liquor company to pay off its growing local government debt, gaining about 150 billion yuan from the transactions. Now, the scale of local government debt has been gradually decreasing, creating a safer and more stable environment for economic and social development.

Balancing financial security and openness

During President Xi Jinping's visit to east China's Anhui Province on Thursday and Friday, he emphasized the importance of technological innovation for Chinese modernization, stating that China must accelerate technological innovation and the upgrading of industrial transformation, and improve financial policies and mechanisms that support technological innovation.

Bai Weiqun, president of China Banking and Insurance Information Technology Management Co. Ltd, stated, "Only through development can we achieve security, and only through innovation can we ensure safety." Many of the problems China faces today cannot be solved by simply managing existing resources. "We need to seek incremental solutions through continuous innovation and progress," Bai said during the panel.

Thierry Delmarcelle, the Asia Pacific chief strategy and innovation officer for Deloitte, emphasized the delicate balance between financial security and stability. While maintaining financial security may necessitate limiting financial openness in the short term, especially in the current geopolitical environment, deep integration into the global financial system is crucial for long-term national security, he said.

Meanwhile, Delmarcelle spoke highly of China's open financial market policy. "The Chinese government adheres to a comprehensive policy of financial opening-up, fully eliminating barriers to entry for foreign capital in the financial services sector and granting national treatment to foreign financial institutions," he said.

Striking the best balance

Delmarcelle also noted that the relationship between financial security and financial development is highly complex, and an overemphasis on either can lead to vulnerabilities in the financial system.

"It is not a question of which is more important between financial security and financial development, but rather how to achieve the best balance between the two," he said.

He also commended the Chinese government's approach to financial development. "The Chinese government is committed to building a high-quality economic and financial development model, which helps to form a good balance between financial development and financial security," he said.

Building a world-class financial system is a long-term endeavor. In the long run, China must navigate the complexities of balancing financial innovation, openness and risk. By strengthening financial regulation, optimizing resource allocation and pursuing an open policy, China can make significant strides toward achieving its goal of becoming a global financial powerhouse.