The top priorities in mainland China’s latest five-year plan are high-quality growth, enhancing innovation and improving domestic demand. But that will require credit to be channelled to more productive and innovative companies, and that means financial reforms.
Banks provide 70 per cent of the country’s finance – far more than in other Asian emerging markets and developed economies – with just 15 per cent of new financing coming from bond and equity issues in 2019, even though bank lending is less efficient and costlier.
And most loans are to state-owned enterprises even though the private sector now drives GDP growth, employment and innovation. Reforms must thus improve credit allocation, especially to growth-oriented small firms.
Meanwhile stock market reforms must expand the registration-based initial public offering system that lets companies and investors decide the scale, valuation and timing of new share offerings instead of requiring regulators’ approval. It applies to the STAR and ChiNext markets for innovative firms but should be extended to the entire A-share market.
Making listing more transparent and faster will help companies access equity financing. And easier delisting will lift the quality of quoted companies. If international tensions cause mainland Chinese firms listed in the US to fear having to move or delist, a registration-base system will offer them an easier way to come home.
Regulators want to attract more longer-term investors, including foreign shareholders. Relaxations to investment restrictions already allow greater foreign access, but mainland China is still at an initial stage of financial opening up: the 4 per cent of shares and bonds with overseas owners is less than in other Asian emerging markets.
Quota restrictions have been removed, foreign currencies and hedging permitted, and it is easier to repatriate funds. But future rule revisions must expand the scope of permissible investment to investment funds, commodities futures and options, plus initial and secondary stock offers.
There are also plans to improve the Shanghai/Shenzhen-Hong Kong Stock Connect schemes that allow global investors to invest in mainland China’s onshore markets from abroad without regulators’ approval. Future steps could add STAR while seeing mainland Chinese shares given a greater weighting in international stock indices.
The five-year plan also sees a greater role for smaller banks. These tend to be private, unlisted, less profitable and low capital levels constrain their lending. Reforms could streamline their issuance of secondary capital debt and perpetual bonds, besides encouraging mergers and using financial technology.
The large state-owned banks became joint-stock lenders at the start of the century. But this is only the beginning: allocating credit in a more market-driven way is still central to reforms for state-owned commercial banks.
Developing a national digital currency is another key part of the five-year plan and the pandemic has accelerated the decline of cash. Trials include issuing 10m renminbi of digital currency to 50,000 people in Shenzhen via a lottery but a major milestone will be its use at the Beijing Winter Olympic Games in 2022.
Besides reducing transaction costs, a digital currency could facilitate renminbi internationalisation and diversification of the current dollar-centric international monetary system.
First published 13 November 2020.
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