Zhang Ming | Inventory of the 20th Anniversary of WTO Accession: The Road to Opening Up china's Financial System

Note: This article is a written interview with the "RoundTable Interview" column of China Forex Magazine, which has not yet been officially published, and will not be reprinted by traditional media. Thank you Professor Zhong Wei for his enlightening questions. The picture in the text is taken in Beijing Yanqing Di Kettle.

Question 1: Let's turn the clock back to 20 years ago, when the hard-working Chinese government finally succeeded in completing the arduous road of negotiations and formally joining the WTO, there was both joy and worry. As far as the baptism that the financial industry will bear is concerned, there are those who exclaim that foreign financial institutions are "wolf coming" and those who criticize the listing of China's banking industry stocks and "selling them cheaply". At that time, it was not only a tough moment for state-owned enterprises to get rid of difficulties and transformation, but also the starting point for the rectification of financial business governance. After painstakingly cleaning up old laws and regulations and systematically establishing rules and regulations, China's financial institutions have gradually become an important part of international competitiveness, and the business of foreign financial institutions in China has also made great progress. What do the two of you want to share in detail about the major events?

Zhang Ming: Coincidentally, the author graduated with a master's degree in 2002 and worked in a foreign-funded accounting firm, and happened to participate in the shareholding system transformation and overseas listing of a state-owned commercial bank.

It should be said that after China's accession to the WTO, the shareholding system transformation of state-owned commercial banks and their overseas listings are a very difficult and very important task. For the first batch of foreign institutional investors who ate crabs at that time, the purchase of the initial equity of China's state-owned commercial banks did bear greater uncertainty, so the author did not agree with the theory of cheap selling by state-owned banks.

The share reform and overseas listing have greatly enhanced the degree of marketization and competitiveness of China's state-owned commercial banks. In fact, although foreign commercial banks have entered the Chinese market one after another, they have not significantly seized the market share of the traditional business of Chinese commercial banks. Foreign commercial banks are still more competitive in cross-border investment and financing, global asset allocation, and other cross-border business.

Around 2020, the restrictions on wholly foreign-owned financial institutions in China's financial market will be basically completely relaxed, and the degree of internationalization of China's financial market is expected to increase significantly in the future.

Question 2: Before joining the WTO, China carried out continuous and in-depth reform of its foreign exchange management system, and then it entered the fast track of reform and innovation of foreign exchange management system. Balance of payments management has gradually shifted from focusing on capital inflows and surpluses to two-way balanced management of inflows and outflows, and the convertibility of the current account and capital and financial trading accounts has been continuously improved. Correspondingly, foreign exchange reserves have also gradually stabilized from rapid accumulation, and the balance of payments surplus as a proportion of GDP has gradually entered a new normal of roughly balanced and slightly surplus. In the view of the two, what kind of "WTO accession" test has China endured in this regard? What new challenges will you face?

Zhang Ming: After China's accession to the WTO, China's balance of payments has gone through roughly two stages.

The first phase is from the early 21st century to 2011, when China faced a sustained balance of payments double surplus, that is, a situation in which the current account surplus and the non-reserve financial account surplus coexisted. In this case, the exchange rate of the renminbi against the US dollar is facing continuous appreciation pressure, the scale of foreign exchange reserves is rising, and the central bank is facing greater pressure to write off.

The second stage is that since 2012, China has faced a pattern of frequent fluctuations between surpluses and deficits in current account surpluses and non-reserve financial account balances. Between 2012 and 2014 and 2016, China faced a non-reserve financial account deficit. In particular, between 2014 and 2016, the exchange rate of the renminbi against the US dollar changed from appreciation pressure to depreciation pressure, and China's foreign exchange reserves shrank significantly (nearly $1 trillion from the peak). In order to ease the pressure of the renminbi's depreciation, the central bank has had to tighten controls on capital outflows.

In the future, China's balance of payments pattern will face greater challenges: on the one hand, as the aging population intensifies, China's savings investment gap is about to narrow or even reverse, which means that China will face a pattern of continuous shrinking current account surplus. After a certain point in time, China will begin to face a current account deficit; on the other hand, the volatility of China's non-reserve financial accounts will continue to rise as financial markets and capital accounts open up. This means that in the future, China may begin to face an irregular balance of payments deficit pattern. In this pattern, the renminbi may face greater depreciation pressure, short-term capital may be a large-scale outflow, and there is a mutual reinforcement between the two.

Question 3: For 20 years, the RMB exchange rate has been a focus that cannot be bypassed. When China's foreign trade is growing at a high level and its current account surplus is relatively large, some US politicians are still ringing their fingers about the RMB exchange rate. At the same time, China's initiative to carry out many major foreign exchange reform measures is also like yesterday. The exchange rate formation mechanism, which mainly relies on market regulation, reference currency baskets, and two-way flexible floating, is becoming more and more mature. The trend of the RMB exchange rate over the past 20 years roughly reflects the advantages of China's economy and financial fundamentals over Western economies, and is also an important part of adhering to a normalized and responsible monetary policy. How do you evaluate the change in exchange rates? And what is the prediction of the future RMB exchange rate?

Zhang Ming: In the past 20 years, the RMB exchange rate formation mechanism has undergone major changes, the degree of marketization has increased significantly, the RMB exchange rate is no longer facing continuous unilateral appreciation or depreciation pressure, and a two-way fluctuation pattern has been formed.

The change of the RMB exchange rate formation mechanism can be roughly divided into two stages. Before the 811 exchange rate reform in 2015, the changes in the RMB exchange rate formation mechanism were mainly to increase the daily exchange rate volatility against the US dollar; after the 811 exchange rate reform in 2015, the changes in the RMB exchange rate formation mechanism were mainly based on the reform of the rmb-US dollar mid-price formation mechanism.

Since the 811 exchange rate reform, the mid-price formation mechanism of the renminbi against the US dollar has undergone a transformation from a single pattern (closing price) to a two-factor model (closing price + basket exchange rate) and then a three-factor model (closing price + basket exchange rate + counter-cyclical adjustment factor). With the change of the foreign exchange market pattern, the central bank has twice enabled and twice stopped using counter-cyclical regulators.

Looking ahead, China, as a large open economy, will eventually move toward a clean floating (free-floating) exchange rate system. However, the author believes that it may take some time to fully achieve clean floating. After all, the current Chinese economy is undergoing structural adjustments, the task of preventing and resolving systemic financial risks has not yet been finalized, and at this stage, the Chinese government will try to avoid excessive fluctuations in the RMB exchange rate.

Question 4: The road to joining the WTO is also the process of the international status of the renminbi, the continuous improvement of the overall strength of the country, and the process of increasingly stepping into the center of the international arena with the in-depth advancement of the national "Belt and Road" initiative. General Secretary Xi Jinping has stressed many times that mankind is facing major changes unprecedented in a century, in the eyes of the two, how has the international status of the renminbi changed in the past 20 years? At a time when globalization is encountering resistance and world economic growth is repeatedly weak, what kind of solid path can the renminbi embark on?

Zhang Ming: Since 2009, the Chinese government has vigorously promoted the internationalization of the renminbi, and has adopted a "trinity" strategy of encouraging rmb settlement in cross-border trade and direct investment, developing offshore RMB financial centers represented by Hong Kong, and signing bilateral local currency swaps between the People's Bank of China and other central banks.

From 2009 to 2017, the internationalization of the RENMINBI went through a complete cycle. Among them, the first half of 2009 to 2015 is the rising period, and the second half of 2015 to 2017 is the decline period.

Since 2018, the internationalization of the renminbi has entered a new cycle, and the Chinese government has also changed the strategy of internationalization of the renminbi and began to implement what we call the "new trinity", that is, to expand the commodity pricing function of the renminbi, accelerate the opening of domestic financial markets to foreign institutional investors, and cultivate real sticky demand for the renminbi in neighboring countries and countries along the Belt and Road.

At present, the renminbi accounts for about 2-3% of global settlement, global foreign exchange transactions and global reserve currencies, ranking fifth to seventh.

Under the background of the continuous long-term stagnation of the global economy, the rise of trade protectionism and the continuous drag on economic globalization, as long as China's economy can maintain sustained and rapid growth, as long as China's financial market can continue to increase the depth and breadth of liquidity, as long as we can avoid the outbreak of a systemic financial crisis, the international status of the renminbi will continue to expand. By 2035, the renminbi is expected to surpass the pound sterling and the yen across the board to become the third largest international currency after the dollar and the euro.

Question 5: Since the 18th National Congress, the high-level and all-round opening up of China's financial industry to the outside world has been accelerating, the renminbi has become an important member of the SDR, the convertible quality of capital accounts has been significantly improved, the restrictions on the shareholding ratio of foreign institutions in China have been basically eliminated, and the capital market and bond market of foreign capital in China have become increasingly active. At the same time, the participation of Chinese institutions, Chinese enterprises and residents in overseas financial activities has gradually become the norm. Faced with the examination paper of WTO accession, how do the two score the performance of China's financial industry in continuously fulfilling its WTO accession commitments? Looking forward to the future, what are the new expectations for the proposition of China's financial opening up to the outside world?

Zhang Ming: 20 years after joining the WTO, we suddenly look back and not only is the international status and international influence of China's economy and financial markets different from those of the past, but China's financial industry has also continued to grow and develop after experiencing the impact of WTO accession. It can be said that we have perfectly grasped the precious opportunity of joining the WTO and achieved extremely important leapfrog growth.

In recent years, the Chinese government has accelerated the pace of opening up financial markets. On the one hand, we have relaxed the investment quota restrictions of QFII and RQFII; on the other hand, we have also fully opened up the access restrictions for wholly foreign-owned financial institutions. With the two-way opening of China's financial market, the depth, breadth and liquidity of China's financial market will naturally increase significantly, which in turn will promote the improvement of the international status of the renminbi.

However, with the opening of financial markets, we will also face the risk of increasing volatility such as capital flows, asset prices, and RMB exchange rates in the future. In addition, China is still in the process of preventing and resolving systemic financial risks. This means that while financial markets are opening up faster, it is still necessary for the Chinese government to retain appropriate controls on capital flows. Of course, specific regulatory instruments can gradually change from quantitative instruments to price instruments, for example, in the future, a Tobin tax whose tax rate dynamically adjusts with the scale of capital flows can be considered.