Seven Pieces of Experience of the Opening-Up of China's Financial Market

The history of China's reform and opening up is a history of breaking the old and creating the new，bravely exploring and boldly innovating. Financial market opening，as an important part of the great practice of reform and opening up，has gained valuable experience for expanding opening up on all fronts and establishing an internationalized financial system compatible with the new system of an open economy at a higher level.

One: Adhering to the concept that finance serves the real economy

For a long time，China has always emphasized that finance is supposed to serve the real economy. Since the beginning of reform and opening up in 1978，the relationship between finance and real economy in China has been gradually straightened out. In 1991，Comrade Deng Xiaoping pointed out that "Finance is the core of modern economy. If finance is activated，everything is activated." Since the international financial crisis in 2008，China's financial industry has experienced a rapid growth，turning China into a major financial country compatible with its status as a major manufacturing state. Since the 18th National Congress of the Communist Party of China (CPC)，General Secretary Xi Jinping has delivered a series of important speeches on financial work at the National Financial Work Conference，the 19th National Congress of CPC，the Central Economic Work Conference and other conferences，stressing that finance should serve the real economy and meet the needs of economic and social development and the people.

In promoting the two-way opening of the financial market，China has firmly headed in the direction that the financial opening serves the development of real economy. First，financial opening has focused on the main contradiction of China's resource endowment. At the beginning of the reform and opening up，China faced the shortage of foreign exchange and capital. In this context，all measures for market opening and foreign exchange administration focused on this main contradiction in economic development. In terms of policy orientation，management systems and management concepts，all emphasis was placed on increasing the effective supply of foreign exchange and ensuring reasonable distribution of foreign exchange demand.

Additionally，the policies were adjusted in time in the subsequent historic changes in China's resource endowment，so as to make full use of foreign exchange funds to escort the rapid economic development. Second，the development of renminbi convertibility has followed the principle of opening from the current account to the capital account. In December 1996，China's current account became convertible，adapting to the development mode of export-oriented economy. Since the beginning of the 21st century，capital account convertibility has been promoted in an orderly manner，and resource allocation at home and abroad has been further optimized. On the whole，projects correlated strongly with the real economy have been more open. Third，the form of financial opening has been targeted at fulfilling the needs of the real economy. In the early stage of reform and opening up，in order to narrow the "double gap" of capital and foreign exchange in the development of real economy，China mainly facilitated the financial opening and foreign capital utilization by indirect financing such as trade financing and bank loans，efficiently supporting the development of real economy. Since the beginning of the new century，the way of foreign capital utilization in China has gradually changed from indirect financing to direct financing such as issuing stocks and bonds in overseas capital markets，but the principle of actual need remains a basic principle for enterprises and individuals to participate in various activities of financial opening. Fourth，cross-border arbitrage and illegal activities have been severely cracked down on. China has clamped down on false and deceptive transactions，illegal activities in the foreign exchange sector like underground banks，and behaviors such as market manipulation，misleading and deceiving investors，so as to ensure that financial opening serves the real economy.

Two: Taking the path of expanding financial opening step by step

Financial opening should take into account both the favorable factors such as the continuous enhancement of China's comprehensive national strength and the ability to resist financial risks，and the adverse ones like the unreasonableness in economic structure and the vulnerability in financial system. Based on this，China has promoted financial opening in a phased and step-by-step manner in accordance with the stage of economic development，the level of macroeconomic regulation and the ability of financial supervision.

First，step by step features the steady progress of the opening up. Financial reforms，including exchange rate marketization and renminbi convertibility，need to take gradual steps according to the actual conditions instead of being settled at one go. The market-oriented reform of China's exchange rate has taken a path from the dual exchange rate system to the single and administrative floating exchange rate system，and develops to the administrative floating exchange rate system based on market supplies and demands and referring to "a currency basket" for adjustment. With regard to renminbi convertibility，China has followed the basic order of current account before capital account，long term before short term，inflows before outflows，and institutions before individuals. It can be seen that the reforms of the mechanism of renminbi exchange rate formation and the renminbi convertibility under capital account are both incremental reforms that start from the margin and substitute Pareto improvement for Pareto optimal，correctly handling the relationship between reform，development and stability.

Second，step by step is reflected in the gradual expansion of the scope of opening up. In expanding China's financial opening，pilot projects are carried out before the policies are widely implemented，which is a remarkable feature of China's reform and opening up. In the process of supporting financial opening，foreign exchange administration has carried out many pilot projects in such areas as facilitating the payment of receipts under capital account，the external debt of non-financial enterprises，and the foreign exchange sales and purchases by non-bank financial institutions. The practice shows that the effective selection of appropriate open window，platform and framework，and the orderly promotion of opening from pilot areas to the whole country can reduce the cost of trial and error，steadily improving China's financial opening level and financial system competitiveness，and forestalling systemic financial risks.

Three: Following the development path of a major country with China as the mainstay

General Secretary Xi Jinping pointed out at the fifth Plenary Session of the 19th CPC Central Committee that since the beginning of reform and opening up，especially after China's accession to the World Trade Organization (WTO)，China has joined the international circulation. With both market and resources being "outside"，China has become "the world factory". Accordingly，financial opening is characterized by active utilization of the international financial market to serve the international circulation. In the early stage of reform and opening up，indirect financing such as overseas trade financing and bank loans was the main way for China to use the international financial market. From 1979 to 1991，China's foreign loans totaled US$52.56 billion，compromising 65% of the actually utilized foreign capital. After the accession to WTO in 2001，China has deeply integrated into the global industrial chain，with the level of corporate internationalization greatly improved. The focus of external financing has shifted to the developed international financial markets in Europe and the United States，and direct financing channels represented by Chinese concept stocks and Chinese dollar bonds have successively expanded，broadening the channels to fill the capital gap by using the services of international financial markets.

After the global financial crisis in 2008，the domestic financial market has been playing an increasingly important role in opening up. China has begun to show typical characteristics of a major economy in recent years，with its key feature and core advantage being the domestic big circulation as the main drive. The strong domestic market has become the biggest competitiveness of China，and also the greatest attraction of opening to the outside world. With the gradual development and maturity of China's economy and financial market，it is an objective law and unstoppable process of historical development to promote high-level and two-way opening through comprehensively synergizing the domestic financial market with international best practices. In this context，in order to give better play to the internal advantages of China's super-large economy，the focus of the overall planning of the domestic and international situation has gradually shifted to the domestic market and the renminbi，which complies with the basic law of financial opening of a major country.

Four: Balancing the relationship between reform，opening up，development and stability with a systematic approach

First，taking into account various relationships in the financial sector in a systematic way. Financial market opening involves many aspects such as market access，foreign exchange administration，foreign exchange market，and renminbi internationalization. The important experience of China's financial opening is to coordinate the opening in various fields as an organic part of a complete system at both the macro level and the micro level，including the long-term and short-term development of the fiscal and financial sectors. The opening of a single financial market needs to fully take into account the stability of renminbi exchange rate and effective control of cross-border capital flows，so as to avoid the negative impact of the "individual advancement" in this field on other fields.

Second，sticking to the policy combination of "intermediate solution" rather than "corner solution". In an open economy，according to the "triple paradox"，a country can only achieve two of the three goals (exchange rate stability，monetary policy independence and free capital flow)，namely the "corner solution". However，China has provided a different solution in advancing reform and opening up in a coordinated way: the three goals are all kept through the combination of "partial stability of exchange rate，partial independence of monetary policy and partial free flow of capital"; meanwhile，the three tools are all used，that is the managed floating of the renminbi exchange rate，a balanced monetary policy and incomplete convertibility under the capital account. This combination of "intermediate solution" is most suitable for the reality of China's gradual financial opening，and pushes forward China's financial reform in a way featuring discretion and Pareto improvement.

Five: Taking the road of financial opening with Chinese characteristics based on our conditions

China's financial opening has not rigidly followed the economic and financial liberalization order of Transition Economics to adopt the one-step "shock therapy" or the "Washington Consensus" of neoliberalism. Instead，based on its conditions as a developing country，China has grasped the basic laws and the changes of the main contradiction in economic and financial development，and concentrated on solving the prominent problems in financial reform and opening up at present and in the future. Once the key link is grasped，everything else falls into place.

When unilateral expectations appear in the financial market，the main policy objective is to stabilize the market and prevent risks. Facing the impact of the Asian financial crisis in 1998，China finally achieved the set goal of "stabilizing the exchange rate and increasing reserves" through the means of foreign exchange administration. When the foreign exchange market was faced with the intensive impact of the vicious circle of "falling exchange rate expectation - cross-border capital outflow - declining foreign exchange reserves" at the end of 2015，the market expectations and the balance of supply and demand were stabilized and the vicious circle was broken by maintaining the basic stability of the renminbi exchange rate at a reasonable and equilibrium level. When the internal and external environment is relatively stable，the main policy goal is to deepen the reform. From 2009 to 2015，with the basic balance of international payments，the administration of foreign exchange has followed the overall plan of opening the financial sector wider to both domestic and international markets，and proposed the "five changes" in management concepts and methods，with the emphasis shifting from review and approval to monitoring and analysis，from pre-event supervision to after-the-event management，from behavior management to entity management，from "guilt assumption" to "innocence assumption"，and from "positive list" to "negative list". These measures have both expanded the opening of the capital account，and facilitated the foreign exchange utilization.

Six: Following the financial opening strategy driven by both reform and opening up

Openness fosters competition，and competition improves efficiency. Since China's accession to WTO，sectors that are more open to the outside world，more motivated to introduce foreign capital，and more active to participate in the allocation of global resources，generally enjoy better development and stronger competitiveness. Therefore，the financial industry should unswervingly take the road of modernization driven by reform and opening up.

First，financial opening has diversified the financial products. New business forms such as unsecured credit loans，village banks and personal agency of insurance sales，have all been introduced by foreign-funded institutions to help meet the diversified needs of the rapidly growing market. Second，financial opening has improved the ability and level of the financial sector to serve the real economy. Foreign-funded banks with the advantages in governance structure，management mode，risk pricing and other aspects have served as a good example for Chinese banks. The transformation and upgrading of domestic financial institutions have been accelerated in the competition，and the operational efficiency and service quality of the financial industry have also been improved. Third，financial opening has also improved the institutional rules and stimulated the supply of financial policies，contributing to high-quality economic development.

Chinese institutions have the ability and space to cope with the competition from foreign financial institutions. China's financial market capacity is large enough to accommodate more foreign financial institutions. More importantly，there is not only competition between Chinese and foreign institutions，but also opportunities for win-win cooperation. Foreign financial institutions generally enjoy advantages in business，products and management ability，while Chinese financial institutions have natural advantages in market resources，customers and channels. Thus，they can take advantage of each other's strengths for common development.

Seven: Protecting fundamentals and making innovations to safeguard China's financial security，stability and development interests

Financial security is an essential part of national security. In promoting financial opening，China has persisted in protecting our foundations while making innovations，and constantly increasing the effective supply of financial opening policies，so as to meet the needs of market entities for foreign exchange utilization，and prevent systemic financial risks.

The term 'protecting fundamentals' refers to means that China attaches great importance to the supply of financial security policies in financial opening. China has advanced the modernization of national governance system and governance capacity in an open environment，and improved the modern financial supervision system that responds to external shocks. On the one hand，we have established a "macro-prudential and micro-regulatory" management framework for cross-border capital flows consistent with international practices and Chinese characteristics，maintaining the stability of the foreign exchange market and China's economic and financial security. We have also kept foreign exchange reserves above US$3 trillion to serve as a stabilizer and ballast for China's economic and financial security. On the other hand，we have facilitated technologies to empower financial regulation. We have built a monitoring system for cross-border capital flows based on artificial intelligence and big data technologies，and improved the ability of cross-border financial blockchain service platforms for foreign exchange receipts and payments and cross-border financing.

The term "innovation" refers to the key role of the domestic market and the renminbi in the process of financial opening，and gets rid of the shadow of "original sin" in the financial opening of emerging economies. The root cause of currency crisis and debt crisis in financial opening of these countries is that they heavily rely on the overseas market and foreign currency financing，and the local currency and its financial assets are not well integrated with the international market correspondingly，leading to serious mismatch between currency and maturity and frequent pressure on the balance of payments. In terms of financial opening，China highlights the importance of the domestic market and the renminbi，which is conducive to enhancing the independence of economic and financial development and preventing national sovereignty，security and development interests from being controlled.

By the Research Group of the Foreign Exchange Research Center of the State Administration of Foreign Exchange