Finance is at the center of China’s deepening reforms

From our Yicai Global Partner, Fudan University Professor Huang Qifan – Now and in the future, China is facing challenges from a number of sources, including increased uncertainty in the external environment and low total factor productivity.

Finance is at the center of deepening reforms in the next phase, the main spark of innovation and a critical area for expanding openness.

Currently, China’s total factor productivity growth rate is about 1.25%, which is only 40% of the US growth rate. To reach 60% of US productivity by 2035, when China essentially upgrades, that figure would need to reach 2.7%.

If China’s gross domestic product growth rate reaches about 5% over the next 15 years, the overall factor productivity growth rate is expected to contribute 54% to GDP growth, which is very difficult.

China also faces many challenges, including an over-reliance on imported oil, natural gas and iron ore, and the fact that the country will enter an aging society around 2035.

The focus of deepening reforms in the next phase is financing.

First, it is necessary to set the Chinese currency as an anchor in a timely manner. At present, the yuan is still somewhat pegged to the US dollar, which is by no means a long-term solution in terms of China’s future international status and development.

A country’s currency should be pegged to its share of taxes in its GDP and to the public debt. Only with an independent monetary peg and a Treasury yield curve can he pursue a truly autonomous monetary policy.

Second, China should improve its financial services to better support the real economy. An important factor in the low growth rate of total factor productivity and its low contribution to GDP is the mismatch of factors, especially in terms of financing.

For example, large sums of capital in the form of bank loans were haphazardly injected into the real estate sector in the past. So, what kind of financial system can comply with the policy of “houses are for living, not for speculation”?

Another example is that the profits of listed financial companies account for half of all listed companies. The central government has explicitly demanded that the manufacturing sector retain a certain share, so we should think about what financial services can better support the quality development of the manufacturing industry.

Moreover, we need to promote green finance in line with Chinese realities. The country’s coal-focused energy balance suggests that it is not possible to phase out coal entirely overnight. The financial sector must create a financing system in the service of green transformation.

China also needs to accelerate the development of technology finance for small and medium-sized technology companies. During the last cycle of the consumer Internet era, Chinese Internet giants received large foreign capital investments. This time, domestic enterprises are expected to take advantage of opportunities in the cutting-edge areas of the digital, bio- and green economy.

An important way for financial services to achieve shared prosperity and close the income gap is to give people greater access to property income. For example, by integrating pensions into one of the pillars of the elderly care system and by investing pensions in the capital market through market-based measures.

This text is an abridged version of his speech at the 2022 PBCSF Chief Economists Forum in Tsinghua.