Financial services reform aids growth shift

The reform and opening-up of China's financial services sector will provide impetus for the economic structural shift needed for the country's two-speed growth model, according to Hui Tai, chief market strategist in Asia for JP Morgan Asset Management.

Domestically, the growth of the financial services industry is important to channel funds into services and high-technology sectors to help their fast expansion, he says, while internationally, the sector's liberalization would better facilitate economic integration with the world.

"Financial reforms accelerate China's structural shift because its opening-up is intricately linked to China's economic opening-up," Hui says. "The opening-up of the financial services sector also provides liquidity and capital to other parts of the economy, and would aid reforms in those sectors."

China is undergoing a structural shift from a cheap manufacturing and export-driven growth model to a high-technology, service-oriented, sustainable growth model. Within this structure, heavy, traditional industries such as manufacturing are quickly slowing down, while emerging industries like healthcare insurance, the Internet, alternative energies and financial services are playing a bigger role in economic growth.

The country has already made tremendous efforts to liberalize its capital account, such as with the qualified foreign institutional investor program and qualified domestic institutional investors program, allowing investment capital to flow in and out of China more freely.

"Further reforms outlined in proposals for the 13th Five-Year Plan (2016-20), such as interest rate liberalization and exchange rate liberalization, are important, too, because economic reforms and financial reforms go hand in hand with each other," Hui says.

At the same time, there are other questions to be answered, he says, such as how to push for further internationalization of the renminbi, and how to reduce the exchange rate differential between onshore and offshore renminbi.

Hui says financial reforms help China to further integrate its economy with the global economy, which would help China's domestic financial markets achieve more stability.

For example, turmoil like the kind experienced by China's stock market in the summer could be made less severe if more long-term-thinking institutional investors were encouraged to join the market, which is currently dominated by retail investors with a herd instinct, he says.

"To encourage more institutional investors to enter the stock market, the government should reform some of the rules."

One example, he adds, is the rule that companies can autonomously decide to stop trading stocks for a period of time, which poses a liquidity problem for institutional investors and could be an area ripe for reform.

cecily.liu@mail.chinadailyuk.com