What Does Financial Opening Up Mean to China?

The financial opening up has three main components. First，the liberalization of the local currency，which is the minimum threshold and foundation of a country’s financial opening. So far，the RMB liberalization reform is still in progress，in other words，the RMB is not yet a fully convertible currency. The rising share of the RMB in the Special Drawing Rights (SDR) from 10.92% to 12.28% does not equal to a share of 12.28% in the international market，because the RMB has not been liberalized in essence.

Second，the internationalization of institutions. China is ahead of the curve on this point，with the maximum relaxation for foreign commercial banks，insurance companies，securities companies and other financial institutions to set up independent legal persons and branches in China. The pace of reform in this area is relatively fast.

Third，the all-around opening up of the financial market，which means investors，can invest freely in the Chinese market under Chinese laws，that is，free capital inflow and outflow. At present，the opening of China’s capital market is exploratory，and can be characterized as “pipeline” opening，including the Qualified Foreign Institutional Investor (QFII)，RMB Qualified Foreign Institutional Investor (RQFII)，Shenzhen-Hong Kong Stock Connect，and Shanghai-Hong Kong Stock Connect to open the capital market to the outside world. This type of opening，however，is very limited，evidenced by the low proportion of foreign investors of about 4.5% now，even after the removal of quota restrictions on the Shenzhen-Hong Kong Stock Connect，Shanghai-Hong Kong Stock Connect，and QFII. Obviously，we cannot consider it a fully open market. Foreign investors as a percentage of China’s financial market，especially the capital market，is comparatively low among major economies in the world.

These are the three components of financial opening from my point of view. Among them，the opening of financial institutions has progressed quickly，with the internationalization of financial institutions basically completed，while the liberalization of the RMB and the all-around opening up of the capital market are still in the exploration stage.

What are the difficulties，challenges or problems of financial opening for China?

The reform of China’s exchange rate regime introduced on August 11，2015，which is known as “8.11” exchange rate reform，was an important attempt to realize RMB liberalization，and establish a fully market-based exchange rate system in a short period of time. However，China’s foreign exchange reserves plunged to the alert line of US$3 trillion soon after the reform. Later，by adjusting certain measures，the foreign exchange reserves stabilized，which hover around US$3.2 trillion now. Why does the RMB liberalization reform pose such a serious challenge to China’s foreign exchange reserves? The “8.11” exchange rate reform indicated that some financial opening infrastructures may not be ready with systematic deficiencies.

There must be reasons behind the foreign exchange reserves reduction of US$900 billion shortly after the “8.11” exchange rate reform. An apparent explanation is a lack of confidence，which will bring about a substantial reduction in foreign exchange reserves. Based on the data，the foreign exchange reserves plummeting by US$900 billion cannot be described as foreign capital flight，because it is the endogenous capital that plays a pivotal role in China’s economy，and some endogenous capital and residents lacked confidence. Some also believe the rapid pace of reform at that time may be to blame，but I do not agree. In my opinion，three reasons may account for it.

First，certain concerns people had about the legal system which was expected to further improve undermined their confidence and expectations. In fact，as long as we follow the path of socialist market economy with Chinese characteristics with unswerving commitment and keep deepening the reform and opening up，China’s economy，without major problems，will still have great competitiveness in the future.

Second，people had concerns about the security of property. A crucial role of the legal system is to protect property rights. Once people have worries about the security of property，the liberalization of the RMB exchange rate may result in a significant reduction of foreign exchange reserves. In fact，we have been improving the legal system，for instance，promulgating the Civil Code to protect citizens’ legal property from infringement. Nevertheless，in the short term，one of the difficulties encountered by China’s financial opening is still a lack of confidence. We must restore confidence and stabilize expectations by improving the legal system，which is the cornerstone of the reform，and opening up and sustainable economic growth. The cornerstone of China’s economy will be stable as long as people have confidence and optimistic expectations for the future.

Third，the sustainable growth and especially the innovation capacity of the economy also played a vital part. Financial opening，whether it is the liberalization of the RMB or the all-around opening up of the financial market，requires good expectations and solid credit，