Finance is at the heart of deepening China’s reforms

From our partner Yicai Global, Huang Qifang, a professor at Fudan University, China is now and in the future facing problems from a number of sources, including increased uncertainty in the external environment and low overall productivity factors.

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

At present, the overall growth rate of factor productivity in China is about 1.25%, which is only 40% of the US level. To reach 60% of US productivity by 2035, when China will essentially achieve modernization, this figure must reach 2.7%.

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

China is also experiencing many challenges, including over-dependence on imports of oil, natural gas and iron ore, and the fact that the country will enter a period of aging society around 2035.

The focus of deepening reforms at the next stage is funding.

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

The country’s currency should be based on the share of the tax in its GDP and public debt. Only in the presence of an independent monetary peg and a treasury yield curve can it have a truly autonomous monetary policy.

Second, China needs to 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, in the past, the real estate sector was accidentally infused with large amounts of capital in the form of bank loans. So what financial system can be consistent with the policy that “homes are for living, not for speculation”?

Another example is that the profits of listed financial companies account for half of all registered companies. The central government has clearly demanded that the manufacturing sector maintain a certain proportion, so we need to think about which financial services can better support the quality development of the manufacturing industry.

Moreover, we must develop green finances in line with Chinese realities. The country’s coal energy balance shows that it is impossible to give up all coal electricity overnight. The financial sector should introduce a system of financing for 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 have undergone large investments of foreign capital. This time it is expected that domestic enterprises will take advantage of opportunities in the advanced spheres of digital, bio- and green economy.

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

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