Author Sang Baek Hyun, Suyeob Na, Youngsun Kim, Ko Un Cho, and Bongkyo Seo Series 20-09 Language Korean Date 2020.12.30
China's financial opening has progressed at a very slow pace, unlike the manufacturing and trade sectors that have pushed for an active opening to the outside world. The Chinese economy has been growing rapidly while serving as a global production base, but since 2012, it has become necessary to modify its approaches to achieve growth as it enters the so-called “New Normal (新常態)”, an era of medium-speed growth. Recently, new reform and opening measures have been taken in various fields to improve the quality of the Chinese economy, and the need for reform and opening in the financial sector has also increased. Internally, the financial system centered on China's state-owned commercial banks has focused on indirect financing, which has served as a major obstacle to upgrading China's economy and industry to the next level, further increasing the need for reform and opening of the financial sector. Moreover, externally, the U.S.-China conflict which began in earnest in 2018, is applying strongly pressure toward reform and opening in China’s financial sector. The Chinese government began to show a proactive attitude toward financial opening amid such internal needs and external pressure, and an important development was seen in China’s financial opening when President Xi Jinping declared further opening measures at the Boao Forum in April 2018. The Chinese financial authorities have prepared follow-up measures related to financial opening, and the Chinese government’s efforts toward financial opening in the three years from 2018 to 2020 yielded more results than the ten-year opening period since its accession to the WTO.
Against this backdrop, this study examines the main contents of China’s financial opening process, which has been accelerating recently, and derives evaluation and implications. It analyzes environmental changes in internal, external, and industrial and technological aspects encompassing China’s financial opening since 2018. First of all, regarding the internal environment of China’s financial opening, we examined changes in the policy and institutions of Chinese financial opening by dividing these into the two categories of the financial service industry and capital account. Secondly, in terms of external environment, it was analyzed how the intensifying conflict between the U.S. and China affected China’s financial opening and Hong Kong’s status as a financial hub. Finally, the environmental changes in industry and technology were examined by looking at the recent development of China’s digital finance and international cooperation in the area, and their significance for the U.S.-China competition. Through this, we evaluated the financial opening of China and derived policy implications for Korea’s response and direction for financial cooperation with China.
Chapter 2 analyzes the current status and policies of Chinese financial market openness as a result of internal environmental changes. The Chinese government’s policies and systems in the financial opening were analyzed across two categories: financial services and capital account. Financial services were again divided into banking, securities, and insurance sectors. The capital account was examined by dividing it into the stock market and the bond market. In the case of the financial services sector, the Chinese government has taken the most active measures to ease or remove restrictions on the share ratio and scope of work permitted for foreign financial institutions among all sectors of banking, securities, and insurance. Compared to this, the Chinese government is taking a more cautious approach in the capital market, creating and managing channels for foreign capital to enter the Chinese capital market such as the QFII, RQFII schemes, and Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect, and bond connect programs. The opening of the Chinese capital market is mainly carried out by easing or abolishing investment limits on Chinese stocks and bonds through these channels or facilitating investment.
Chapter 3 analyzes changes in the financial opening environment in China due to intensifying conflict between the United States and China, which are external environmental changes. We reviewed the demands by the U.S. upon China to open its financial sector since the negotiations for China’s accession to the WTO. The conflict between the two countries has been complicated since the inauguration of the Trump administration, and thus, the environmental change was analyzed from the perspective of intensifying conflict between them. China’s financial opening has been accelerating since 2018 under U.S. pressure, and as a result, U.S. financial firms are actively entering China. On the other hand, however, as the Trump administration is pushing for various measures of U.S.-China financial decoupling after the Covid-19 pandemic, we carried out analyses and predictions for various scenarios according to the direction of future U.S.-China conflict. We also analyzed how Hong Kong’s status as a financial hub would develop, as it has emerged as a battleground for the U.S.-China conflict since the enforcement of the Hong Kong Security Act in July 2020. By analyzing Hong Kong’s foreign exchange and stock markets, and its capital inflow and outflow, we predicted the short- and long-term impact of the U.S.-China conflict on Hong Kong’s status.
Chapter 4 analyzes the changes in China’s financial opening environment due to the development of China’s digital finance, focusing on industrial and technological aspects. The background and characteristics of the development of digital finance in China, the status of openness and international cooperation were examined, and the competition in the Digital Belt and Road initiative and the U.S.-China digital finance platforms was analyzed. Mobile payment platforms such as Alipay in China are actively entering the mobile payment market in neighboring regions with poor financial systems, such as Southeast Asia, employing QR code payment methods based on the competitiveness accumulated in the Chinese market. The expansion of international cooperation in China’s mobile platforms is expected to be carried out in conjunction with China’s Digital Belt and Road initiative and internationalization of the renminbi, but the competition for hegemony in digital finance between the U.S. and China is also expected to intensify. Therefore, this study examined China’s countermeasures to prepare for U.S. financial sanctions, such as CIPS and QR code-compatible international mobile payment systems.
Based on the analysis of the previous chapters, Chapter 5 evaluates China’s financial opening and forecasts future developments, going on to present the direction for Korea’s response. Since 2018, foreign companies in the financial service sector have been able to enter the Chinese market with China actively opening its financial services sector, and in the case of the capital market, free flow of foreign capital has been allowed by using channels established by the Chinese government. However, although the recent opening of the Chinese financial market is significant as an institutional opening through the revision of laws and regulations, there could be many non-institutional obstacles for foreign financial companies to enter the Chinese market and actually pursue their businesses. In addition, the Chinese financial opening measures currently remain a one-way opening, focusing on the inbound market. The two-way opening that the Chinese government aims for, especially the opening of the capital account, is expected to be possible only after the capacity of Chinese financial authorities to manage financial risks and the competitiveness of Chinese financial companies have improved.
It is necessary to watch more closely how the intensifying conflict between the U.S. and China affects China’s financial opening. In particular, we may see different patterns depending on what tools are used after the inauguration of Presiden Biden. China is respon-ding to the U.S.-China decoupling, prompted by changes in the external environment of deepening U.S.-China conflict which has been in full swing since 2018, by expanding its financial opening. For China, the risks of China’s real economy can be shared with the U.S. through the financial opening, and for the U.S., the cooperation between the two countries is likely to continue to expand as the U.S. can earn profits from the development of China’s real economy. Concerns about Hong Kong’s status as a financial hub have been raised due to the U.S.-China conflict, but it looks difficult for global financial companies to move to other regions due to their business with China. However, as China's financial openness expands, competition between Hong Kong and mainland China (Shanghai and Shenzhen) is expected to intensify in the mid-to-long term.
The development of digital finance in China and overseas expansion of mobile platform companies are being driven by private companies. The Chinese government also places great importance on establishing a mobile international payment system in promoting the Digital Belt and Road initiative, so it is expected to be established in connection with future national strategies. This linkage of China's digital platforms and international payment system is likely to be utilized for the internationalization of digital renminbi in the long term. Looking at the competitive landscape between the US and China, it is expected that the US will intensify checks against China's digital finance internationalization in the future. This is because China's digital international payment system is likely to threaten the current U.S. dollar-centered international currency system.
In response to China’s financial opening, Korea’s countermeasures are to demonstrate competitive advantage through localization and differentiation in the banking sector, cultivation of its ability to integrate global resources and service transactions in the securities sector, and the establishment of sales networks with local govern-ments in the insurance sector. In the case of stock and bond markets, the risks followed by Chinese authorities' supervision on the foreign exchange market and the volatility in the Chinese stock market should be checked.
China's financial opening following the U.S.-China conflict is expected to serve as an opportunity for Korean financial companies to enter the Chinese financial market. However, Korea's financial industry will need a differentiation strategy due to a low level of internationalization and global competitiveness. In addition, until China's capital market is opened in both directions, it is necessary to establish a strategy with a long-term perspective and approach it with a 'selection and concentration' strategy. However, as the U.S.-China conflict may intensify, the U.S. may impose sanctions on China through financial means, meaning it will be necessary for Korean financial authorities and companies to closely monitor the expansion of the U.S.-China conflict, and prepare countermeasures for each scenario.
It is necessary to prepare for the possibility of separate economic blocs forming around the U.S. and China in response to environ-mental changes caused by the development of digital finance in China, and to establish a direction and strategy for our digital platform cooperation. However, prior to this discussion, it was also suggested that efforts to form the Korean digital finance market and enhance its competitiveness should be given priority.
Lastly, policy implications for Korea-China financial cooperation following the expansion of financial opening in China were derived. In regard to Korea-China financial cooperation, valid suggestions would be: expanding discussions about financial cooperation via Korea-China economic dialogue channels; establishment of a Korea- China financial stability consultative body; discussing follow-up negotiations for the Korea-China FTA and promoting pilot financial cooperation projects; expansion of research to vitalize financial investment of Chinese industries and companies; and training specialized human resources in Korea-China finance.
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