Financial reforms to propel opening-up

SONG CHEN/CHINA DAILY

Foreign-funded institutions generally acknowledge that China has opened up its financial market wider. But why is there still a gap between China's policy efforts and foreign financial institutions' sense of gain? Perhaps because of the difficulties and challenges faced by these institutions in doing business in China.

In addition to a survey, we (Institute of World Economics and Politics of the Chinese Academy of Social Sciences) also conducted 10 meetings with financial institutions from the United States, Japan, the European Union, and the Hong Kong Special Administrative Region. Based on those meetings, we divided the difficulties faced by the foreign financial institutions in entering different markets (not only the Chinese mainland market) into five categories, and analyzed the mainland market.

First, we found unfair treatment at a regulatory level both in name and in reality. These issues need to be addressed especially in areas such as pre-establishment national treatment and the negative list. In fact, China is already ahead of other developing countries in this aspect.

The Special Administrative Measures for the Access of Foreign Investment (Negative List) 2020 and the Special Administrative Measures for the Access of Foreign Investment to Pilot Free-Trade Zones (Negative List) 2020, introduced on July 23, 2020, apply to the whole mainland area and the pilot free-trade zones respectively. They also further relax the conditions for accessing China's financial sector and guarantee higher-level opening up.

From a regulatory perspective, China basically guarantees the same treatment to domestic and foreign institutions. No wonder many foreign institutions, during the survey, acknowledged that China has further opened up its financial sector.

Second, some foreign-owned institutions said that although they should have received fair and equal treatment, they still faced difficulties when applying for a license and/or permit to access China's financial market. It is important here to clarify that the systems of the negative list and licensing are not contradictory. The negative list signifies that foreign investors can access China's markets that are not prohibited, but they need a license to actually do so. It is like getting a driver's licence before you can drive a car.

Some foreign institutions also said that certain standards tend to favour domestic financial institutions, and therefore make it difficult for them to compete with the latter.

Third, some foreign financial institutions have claimed the regulatory systems of many economies are immature. Despite the fair treatment promised to foreign institutions in terms of laws, regulations and policies, the discrepancies in the regulatory systems still make it difficult for foreign financial institutions to access the financial market of China and some other host economies.

In China, foreign institutions' problems include non-liberalization of capital and financial accounts, real-demand principle of foreign-exchange derivative transactions, inconsistency in accounting and auditing standards and international norms, window guidance of regulatory policies, high compliance costs, network security and data-management regulations.

Chinese institutions, too, face these problems. But they have a bigger impact on foreign institutions. The annual reports of three major chambers of commerce over the past three years show the biggest problem foreign financial institutions face is the immature regulatory systems of the host economies.

Fourth, many foreign institutions also complained about the immature financial market of the host economies. Despite being treated fairly both on paper and in reality in terms of regulations and policies, foreign institutions still cannot adapt to the immature financial market of the host economies. For example, asset prices in China still fluctuate dramatically.

Also, the scale of safe assets is relatively small. And China's young derivatives market is yet to meet the demand of foreign institutions for hedge funds.

And fifth, foreign institutions also said they cannot acclimatize to the business culture of the host economies.

But even if all the above mentioned issues were resolved, foreign investors may not be fully satisfied with China's financial market. For instance, Japan's financial market is completely open, but foreign-funded banks still account for a rather small percentage of its market. Therefore, foreign institutions may not have a favourable opinion of China's financial market even if it is fully opened.

The first and second categories highlight the obstacles the authorities should overcome to further open up the financial market, while the third and fourth underline the importance of deepening financial reforms.

It is thus evident that China's financial reforms need to take into consideration the national conditions and benchmark the best practices, so as to promote high-quality opening up of the financial market, because financial sector opening-up and reforms need to go hand in hand.

On the other hand, considering China's present conditions, following global standards, improving the regulatory system, and improving the financial market are part of the overall opening up of China's financial market.

Which means the further opening up of the financial sector is inseparable from financial reform. Financial reform is not only necessary for domestic market reform and inner circulation (as part of the dual circulation development paradigm), but also a requirement for financial opening-up and external circulation.

The author is a research fellow at the Institute of World Economics and Politics, Chinese Academy of Social Sciences. The views don't necessarily reflect those of China Daily.