Page 380 - 2020 White Paper on the Business Environment in China
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0 White Paper on the Business Environment in China
2.16 Financial Sector
Key Take-Aways allocation of financial resources to firms. Empirical
studies investigating the effects of China’s financial
Shareholding limits on sector opening on Chinese firms conclude that
foreign financial sector openness alleviates financial
ownership of securities, insurance and fund constraints and upgrades the financing structure
management firms will be removed in 2020. of Chinese enterprises. They further conclude
that financial openness eliminates ownership
Foreign investors will be encouraged to set up discrimination and promotes financing efficiency,
wealth management firms, currency brokerages, removing financial constraints on private and
and pension management companies. profitable enterprises. Financial sector openness
affects financial constraints mainly through
It may be years before companies can actually collateral channels and through the elimination
take advantage of China opening its insurance of information asymmetry. These conclusions
and other parts of the financial industry further to have policy implications that need to be carefully
foreign institutions. addressed. China should be more active in pushing
forward the opening up of its financial sector as
The Chinese government faces an increasingly this would alleviate the financial constraint on
difficult balancing act as it tries to support its domestic firms, improve the allocation of financial
economy without encouraging moral hazard and resources and increase the efficiency of financial
reckless spending. While authorities have so far markets. Financial liberalization is certainly in
been reluctant to rescue troubled borrowers and China’s best interests and should be a long-term
ramp up stimulus, the costs of maintaining that strategic target. The investment environment
stance are rising as defaults increase and China’s matters and is an important factor in achieving
slowdown deepens. this goal. China should make substantial efforts to
improve its overall investment environment in order
Background to guarantee the success of the recent acceleration
of financial sector openness. Removing barriers
For almost two decades, foreign financial for foreign financial institutions to enter China’s
institutions in banking, insurance, securities and domestic financial market does not necessarily
asset management have entered the Chinese mean free cross-border capital flows. While an
market. Despite continued restriction on foreign opened financial service sector may induce more
investment, opening up the financial sector is convenient capital flows into the economy, whether
playing an increasingly important role in China’s a country should fully remove capital control
efforts to build a modern financial system. depends on various conditions (Zhang et al.).
There is considerable evidence that financial
constraints are a key impediment to the capacity Opening of the Financial Sector
and efficiency of investment and in turn the
growth of firms. This is particularly important China pledged in late 2017 to allow overseas
in rapidly developing countries such as China, financial firms greater access to the world’s
yet imperfections in capital markets remain. second-largest economy. Then came the trade
Information asymmetries and agency problems war with the U.S., raising concerns that President
are the most important factors influencing the Xi Jinping could retaliate by going back on his vow.
380
2.16 Financial Sector
Key Take-Aways allocation of financial resources to firms. Empirical
studies investigating the effects of China’s financial
Shareholding limits on sector opening on Chinese firms conclude that
foreign financial sector openness alleviates financial
ownership of securities, insurance and fund constraints and upgrades the financing structure
management firms will be removed in 2020. of Chinese enterprises. They further conclude
that financial openness eliminates ownership
Foreign investors will be encouraged to set up discrimination and promotes financing efficiency,
wealth management firms, currency brokerages, removing financial constraints on private and
and pension management companies. profitable enterprises. Financial sector openness
affects financial constraints mainly through
It may be years before companies can actually collateral channels and through the elimination
take advantage of China opening its insurance of information asymmetry. These conclusions
and other parts of the financial industry further to have policy implications that need to be carefully
foreign institutions. addressed. China should be more active in pushing
forward the opening up of its financial sector as
The Chinese government faces an increasingly this would alleviate the financial constraint on
difficult balancing act as it tries to support its domestic firms, improve the allocation of financial
economy without encouraging moral hazard and resources and increase the efficiency of financial
reckless spending. While authorities have so far markets. Financial liberalization is certainly in
been reluctant to rescue troubled borrowers and China’s best interests and should be a long-term
ramp up stimulus, the costs of maintaining that strategic target. The investment environment
stance are rising as defaults increase and China’s matters and is an important factor in achieving
slowdown deepens. this goal. China should make substantial efforts to
improve its overall investment environment in order
Background to guarantee the success of the recent acceleration
of financial sector openness. Removing barriers
For almost two decades, foreign financial for foreign financial institutions to enter China’s
institutions in banking, insurance, securities and domestic financial market does not necessarily
asset management have entered the Chinese mean free cross-border capital flows. While an
market. Despite continued restriction on foreign opened financial service sector may induce more
investment, opening up the financial sector is convenient capital flows into the economy, whether
playing an increasingly important role in China’s a country should fully remove capital control
efforts to build a modern financial system. depends on various conditions (Zhang et al.).
There is considerable evidence that financial
constraints are a key impediment to the capacity Opening of the Financial Sector
and efficiency of investment and in turn the
growth of firms. This is particularly important China pledged in late 2017 to allow overseas
in rapidly developing countries such as China, financial firms greater access to the world’s
yet imperfections in capital markets remain. second-largest economy. Then came the trade
Information asymmetries and agency problems war with the U.S., raising concerns that President
are the most important factors influencing the Xi Jinping could retaliate by going back on his vow.
380
