Successful financial market reforms to shape up China's future
Since the third plenum of the 18th Communist Party of China Central Committee in November 2013, the Chinese government has been aggressively rolling out various reform initiatives to stem economic imbalances and to improve the quality of growth rather tha
So far, those aggressive measures have been quite successful in steering the economy in the right direction.
This year could be the most exciting period in China’s economic development, where it pushes towards a financially open economy. These reforms will help improve transparency and efficiency of China’s huge financial resources both domestically and globally. The reform measures focus on three key areas – interest-rate liberalisation, domestic capital-market development, and currency internationalisation.
In terms of interest-rate liberalisation, the People’s Bank of China has widened the ceiling of domestic deposit rates from 1.1-times policy deposit rates to 1.5 time to allow more competition among banks. The introduction of a deposit-insurance scheme, effective this month, will bolster interest-rate differentiation among bank deposits and other uninsured investment products such as wealth management products or other shadow-banking-related trust products. This will, in turn, improve transparency of credit pricing and thus support financial-market stability in the long run.
To address the high level of local-government debt, China plans to develop a market for municipal bonds. This will allow direct market financing of local governments and enable them to roll over existing debts (mostly in the form of bank loans and shadow financing) into municipal bonds. A deep and transparent market for municipal bonds will help improve local governments’ fiscal responsibility and transparency, and also offer a new asset class in the Chinese capital market.
The other important development is in the area of currency internationalisation. The recent establishment of the Asia Infrastructure Investment Bank shows China’s enthusiasm to play a bigger role in the international financial system. Moreover, the government announced that it aimed to make the renminbi convertible this year, an important step towards the yuan’s inclusion in the International Monetary Fund’s SDR (special drawing rights) reserve-currency system.
Capital-account liberalisation is positive for China’s financial markets as foreign capital inflows could help increase demand for renminbi-dominated assets. The demand for Chinese equities could also be boosted if the domestic A-share stocks get included in the widely followed MSCI index. The result of the index reshuffle will be announced next month.
Komsorn Prakobphol is head of strategy at Tisco’s economic strategy unit. He can be reached via www.tiscowealth.com or [email protected].
