Financial innovation can improve Chinese companies' global reputation

Consumption growth has not slowed down in China despite the global downturn, thanks largely to the government view that an expanding domestic consumer demand would help sustain economic momentum. However, consumption growth is also largely dependent on demographic and income changes.

It is precisely with these aspects in mind that China is looking to further deepen its economic reforms. The government focus is more on moving away from large-scale standardized manufacturing industry to industries like financial services, and to bolster high-tech development.

The United States, Britain, Japan and other developed countries have all undergone the shift to financial power from mass manufacturing. Financial innovation has been the main motivator for the transition in most of these nations and China is no exception. Therefore, the construction of a large international financial center is an inherent requirement of China's economic transformation and sustainable development.

Whether a city can become a regional or global financial center depends on the degree of economic and legal system internationalization, and how the international community recognizes them.

The traditional advantages of China's manufacturing industry - a large workforce and low cost - are slowly waning. The technological and innovation capabilities of Chinese companies are still at an early stage. A large number of manufacturing companies in China are still at the bottom of the industry chain, engaged in manufacture of high-consumption, low-value-added products. Most of these industries are also labor-intensive and prime candidates for pollution.

To address these problems, it is important to make a transition to the financial services industry and other tertiary industries by promoting mergers and acquisitions among different industry sectors. Financial support for these will also come in handy during the transition.

Coastal cities such as Shanghai and Shenzhen are the most suitable candidates in China for developing the financial services industry on a large scale. This is consistent with the cities' urban transformation goals, and will also highlight their hidden potential. In other words, the road ahead for most Chinese cities would be to become dynamic, international and modern services centers with an emphasis on the financial services industry.

The very essence of the construction of an international financial center is to learn from successful international experiences so as to promote the modernization and internationalization of the domestic financial market system. It is also an integral tool for the internationalization of the renminbi. China has already shown its commitment to follow this trend and also work for international financial stability and balance.

However, the lack of financial innovation has not only hampered the development of high-tech industries, but also inhibited people's opportunity to share the fruits of high-speed economic growth through personal financial investment. These issues will put China's financial system at risk.

If the allocation of social resources can be changed from the current executive-led model to a market-oriented model, it will be totally different. One step is to learn from international practice by establishing floor-trade stock and futures markets and over-the-counter foreign exchange, lending, bond and other derivative markets.

Compared with the decentralized indirect financing services provided by commercial banks, floor-trade capital market features better information access and asset liquidity. Financial product standardization, risk diversification, investment and financing on a large scale are what can be defined as modern finance.

Establishment of such an institution will facilitate the market mechanism to undertake its proper role in financing.

Once Shanghai and Shenzhen complete the transition, the profit patterns of China's manufacturing industry, risk distribution and the financing structure will undergo profound change. New finance, accompanied by the rise of information and communication networks and e-commerce platforms, will help the industry supply chains and distribution and lead to an overall improvement in efficiency. This will also release fresh manufacturing and consumption capacity.

With the increasing internationalization of the renminbi, the interbank money market system will become more mature, and lead to effective liquidity management for manufacturing companies and financial institutions. Once a market-oriented interest rate mechanism is formed, export companies will be shielded from foreign exchange risks.

When effective renminbi cross-border settlement and final settlements are realized, China's manufacturing enterprises will also be able to extend their influence in overseas markets.

If the process of building an international financial center does not go with the trend of the internationalization of the renminbi, it is likely that more Chinese financial institutions will focus on issuing renminbi financial products overseas. This will result in a loss of domestic financial services, finance jobs and financial tax revenue. Chinese banks will lose monetary sovereignty and financial pricing power. This will bring more economic losses to China's manufacturing enterprises.

The current international financial system relies too much on the US dollar, and the systematic risk will rise with the relative decline of the US economy. This, to a large extent, has hampered the exports and profit margins of China's manufacturing enterprises.

China's ultimate goal in establishing an international financial center is to set up an intrinsic, stable and multivariate international monetary system, and to achieve balanced development of global finance.

The author is a post-doctoral fellow at the School of Economics, Renmin University of China. The views do not necessarily reflect those of China Daily.

(China Daily 04/12/2013 page7)