Finance Fuels the Foundation: China’s Journey to Build a Financial and Technological Powerhouse

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The Central Financial Work Conference on October 30-31 emphasized that finance is the lifeblood of the national economy and a crucial element of the country’s core competitiveness. It called for accelerating the establishment of a robust financial system. This marks the first instance of the central government advocating for the creation of a powerful financial nation, sparking widespread attention.

To understand what constitutes a strong financial country and how to expedite its development, the 21st Century Business Herald interviewed Zhang Xiaojing, the director of the Institute of Finance at the Chinese Academy of Social Sciences.

Zhang Xiaojing stated, “In comparison to the robustness of the real economy, our financial sector appears relatively frail. Therefore, it’s imperative to bolster the construction of a formidable financial nation. However, the ‘strength’ of the real economy still falls short of achieving a socialist modernization for a powerful nation. Bridging this gap hinges on the support and role of finance.”

The Central Financial Work Conference advocated for expediting the establishment of a robust financial nation, marking the first time the central government has promoted the concept of a “strong financial country.” How should we interpret this notion?

Crucially, the concept of a strong financial nation underscores the proactive and leadership role of finance. It is often said that the financial sector’s duty is to serve the real economy, implying that finance operates as an auxiliary to the real economy, adjusting to its needs. While this perspective is valid, it may be insufficient. The emphasis on financial strength suggests that finance can significantly bolster a nation’s construction and rejuvenation. Rather than merely following the real economy, finance should actively lead and contribute to the nation’s strength.

Currently,China’s financial sector does not rank second globally, despite China’s GDP being the world’s second-largest when measured by purchasing power parity, surpassing the United States. Hence, finance must strive to enhance its capabilities and global competitiveness.

What are the similarities and differences between China’s construction of a financial power and other financial powers?

Historically, only a few nations, like the Netherlands, the UK, and the U.S., have been recognized as financial powers. These countries share common traits: their currency becomes an international reserve, they control vital financial infrastructure like SWIFT, and they wield influence in global financial institutions.

China’s path to becoming a financial powerhouse differs. Guided by the Central Financial Work Conference’s principles, China emphasizes centralized leadership, a people-centric approach, and prioritizing the real economy over independent financial operations. While China’s financial sector contributes significantly to its GDP, it’s essential to balance growth with managing potential risks, especially as global standards emphasize the importance of risk-adjusted financial metrics.

What are the gaps between China and a financial powerhouse? How to better promote the construction of a financial power in the future?

Becoming a financial powerhouse, especially in science and technology finance, remains a challenge for China. Yet, supporting self-reliance and advancement in science and technology is pivotal for national strength.

A significant hurdle in technological innovation is navigating uncertainties and risks, often referred to as crossing the “valley of death.” The financial system’s primary role is to assess, price, and allocate risks. However, China’s science and technology finance lacks adequate capabilities in these areas, hindering support for innovation.

This gap can be attributed to China’s financial system’s maturity and government intervention in resource allocation. In many late-developing economies, government-led allocation, like credit rationing or implicit guarantees, often distorts risk pricing and credit allocation.

Traditional evaluations of tech startups emphasize historical performance and collateral, which might not be suitable for disruptive innovators lacking extensive histories or peers. To foster innovation, China must adopt more inclusive evaluation criteria, recognizing the value of future potential over past accomplishments.

Modern financial thinking values future potential over past performance. It emphasizes discounting future expectations, recognizing the inherent uncertainties of innovation. To truly support science and technology, China must shift from outdated industrial-era financial models and embrace a forward-looking approach that acknowledges the intrinsic value of innovation.

In the process of building a strong financial country, how can financial liberalization be further expanded while integrating development and security?

Achieving a robust financial nation hinges on ensuring financial security. The confluence of financial development and security sets the foundation for this ambition. Both objectives, strengthening financial resilience and ensuring security, rely heavily on financial innovation.

Bolstering the payment and clearing systems is crucial, especially to diversify payment methods to counter potential financial sanctions. Moreover, developing a robust database system is essential to safeguard national data.

Expanding the financial sector’s systematic openness is key. This involves facilitating cross-border investments, attracting foreign financial entities to China, bolstering Shanghai’s international financial prominence, and enhancing Hong Kong’s stature as a global financial hub. Additionally, progressing the internationalization of the RMB is vital.

The digital age amplifies interconnectivity among global financial systems. Late-developing nations risk being overshadowed by dominant economies, jeopardizing their financial security and autonomy. China must lead in both technological innovation, focusing on vital areas like chips and operating systems, and in setting global financial and digital standards. Actively engaging in global financial and digital governance will help China shape regulations on crucial issues such as financial safety nets, artificial intelligence, cross-border data regulations, market access, and digital privacy.

(Source: 21st Century Business Herald)