China's financial market has a bright future

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Editor's note: Chen Jiahe is the Chief Strategist at Cinda Securities. The article reflects the author's opinion, and not necessarily the views of CGTN.

China is the world's second largest economy when it comes to the gauge of nominal GDP, i.e., the measurement conducted according to the international exchange rates. At the same time, it is the world's largest economy, if we use the purchasing power parity GDP as a benchmark.

However, we rarely say that China has a globally important financial market. We don't say that China's currency is popular in international trade, or China's stock market is globally influential to the majority of global investors.

Despite the large economic scale, China's currency, the yuan, is not yet a dominant currency in international trade. International trade nominated in yuan counts only a few percentage points, while the US dollar and the euro still hold dominate positions, followed by the Great British Pound sterling (GBP).

Stock price movements are seen on a screen at a security company in Beijing on July 11, 2018. /VCG Photo.

It was only until two years ago that the Chinese yuan started entering the special drawing right (SDR) from the International Monetary Fund. Given China's economic miracle in the past 40 years, China's currency still remains less influential in the global financial system. However, it is only when a country's industrial and trading economy is well developed that its finance thrives

As this world no longer uses metal currencies anymore, such as gold, silver and copper, international merchants only accept the most popular and trustworthy currencies in their trades.

As China has only been in the global trading system for around 40 years, the time elapsed is not long enough for its currency to gain enough popularity compared to what its economic and trading products have gained.

It sounds a bit frustrating that China's economy has only obtained recognition for its productions of goods but not production of currencies in the past few decades. The situation, however has been inevitably changing.

As China is now a dominant player in the global market, more and more countries are trading with China. Trust is built during this process, both toward China's solid economic foundation and the value of its currency.

With the lessons we learnt from history in terms of global economy, a country's financial position raises after, not with or before, its industrial economic position. It took the United States a long time for its currency to overcome the GBP, much longer than the time spent for its real economy to gain a superior position.

Tourists take photos on Victoria Peak, Hong Kong on September 27, 2018. /VCG Photo.

In this respect, Hong Kong is another good example. Today Hong Kong is famous for its role as a global financial center. However, back in the 1950s and 1960s, Hong Kong's financial industry was not that significant in the world. At that time, Hong Kong's main economic pillar was manufacturing due to the lack of capital to support a predominate financial market.

However, between 1970s and 1980s, the financial market in Hong Kong thrived. Hong Kong's stock market, insurance market, property market and currency flourished during this period. The strong economic foundation that was accumulated in the previous two decades was the root of this development.

When we look at China's economy today, we are just looking at the period when it is transferring from a world-factory-only status toward a more complicate and mature economy.

Its currency is gradually gaining popularity, its stock market is now widely recognized by the international market, marked by the recent announcement of MSCI and FTSE, and its insurance industry is growing at an approximate 20 percent annual rate.

Therefore, if you want to find good industries in China, I shall certainly suggest that you take a look at its financial sector. The opportunities here are just too great to miss.

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