Coming into a period of major global transitions, China has been pushing for change in its economic growth paradigm. Due to changes in both internal and external economic environments—such as the deepening strategic competition between the US and China, fragmentation of supply chains, expansion of the concept of economic security, the rise of protectionism, slowing economic growth, an aging population, and the emerging risks in the financial sector—China’s economy is facing a variety of factors constraining its growth. In response to these limitations, China has announced promotion of the “new development pattern” through the “dual circulation” strategy, which emphasizes both domestic and international circulations. The Xi Jinping government sees the construction of the new development pattern as a next-generation economic growth strategy that can encompass the dialectical relationship between autonomy and openness, development and security, essential for realizing Chinese-style modernization and high-quality economic development.

Alongside this shift in China’s economic growth paradigm, reforms in the financial sector are also taking place. However, China’s financial development strategy under the new development pattern does not simply follow the financial development theories of Western countries, in which advanced financial markets are already established. The Chinese government aims to follow a strategy of “financial development with Chinese characteristics” and redefine financial practices that suit China’s national conditions. This report examines China’s emerging financial development strategies, analyzes the opportunities and risks posed by changes in China’s financial systems, and draws implications for future economic cooperation between South Korea and China.

Chapter 2 explores the relationship between China’s next-generation economic growth strategy, the new development pattern, and its financial development strategy, as well as the Chinese- characteristic financial development strategy proposed by the Chinese government. China’s financial reforms are centered on stronger regulatory systems, concentrated financial support for key sectors, and the creation of an all-encompassing financial procurement market. These characteristics are also evident in its distinctive financial development strategy. China aims to concentrate financial resources on real economy sectors that need investment to realize its ultimate goal of modernization, and the building of a powerful nation under the new development pattern. Simultaneously, under the leadership of the Communist Party, China seeks to enhance the level of financial supervision to manage and resolve economic risks and address the long-standing imbalances in the financial sector.

Chapter 3 reviews changes in China’s financial supervisory system and the background, current status, and policy direction of the three major financial risk management areas—real estate risk, local government debt risk, and small and medium-sized financial institution risk—one of the primary objectives of strengthening financial supervision. China’s financial supervision system has evolved from establishing a basic supervisory framework alongside the development of the financial market, proceeding through the stages of specialization, collaboration, and integration. In 2023, the “Party and State Institution Reform Plan” was announced, establishing a “one bank, one administration and one commission” supervisory system and institutionalizing the Party’s involvement in the financial industry, thus strengthening the central government’s role. The Chinese government aims to eliminate potential blind spots in supervision to address financial risks that constrain the growth of the real economy through stronger financial supervision. While this approach may effectively manage risks in the financial supervision sector, it could also lead to inefficiencies by causing imbalances in the allocation of financial resources. Furthermore, in the second half of 2024, China announced a variety of measures to stimulate the economy, including various financial measures to address the three major risks, including revitalizing the real estate market and reducing local government debt. These three risks are organically interconnected, and the expansion of one sector’s risks can spread to other areas. Therefore, comprehensive risk supervision and management are needed, rather than focusing on a single sector. Chapter 3 discusses and evaluates the main content of China’s financial risk management, considering these points.

Chapter 4 focuses on measures to reform China’s financial market and strengthen support for the real economy, analyzing the role of the central bank, improvements in monetary policy, supply-side financial reforms, and financial support for strategic industries. China is proposing improvements in the monetary policy transmission mechanism to address challenges such as difficulties in funding for small and medium-sized enterprises and credit tightness in the real economy. China prioritizes economic growth and contributions to the real economy as the main goals of its monetary policy. To reduce the gap between monetary policy goals and actual contributions to the real economy, the necessity of a shift in monetary policy tools is also suggested. However, the persistence of planned economy practices, such as providing interest rate benefits to state-owned sectors, is seen as limiting the effectiveness of China’s monetary policy reforms, which remains an issue in improving the monetary policy transmission mechanism.

In terms of financial support for strategic industries, China has sought to strengthen the capital procurement capabilities of strategic industries through government-led funds. Paradoxically, however, these government-led funds have become a means for the Chinese government to control the financial sector. Furthermore, the misallocation of funds due to a lack of adherence to market principles has led to indiscriminate investments, causing a decline in returns. There is also concern that the focus on strategic industries, such as semiconductors, has led to market distortions.

Chapter 5 begins with the question of whether China’s financial development is driving economic growth, and examines the impact of financial development on economic growth using the IMF’s financial development index. The study found that, from 1980 to 2020, the financial development index maintained a positive relationship with China’s economic growth over the long term, and the relationship was statistically significant. More specifically, the financial development indices such as financial institution depth (FID), financial institution accessibility (FIA), financial institution efficiency (FIE), financial market depth (FMD), and financial market efficiency (FME), but with the exception of financial market accessibility (FMA), maintained a positive relationship with economic growth. The conclusion is that, in the long run, China’s financial development has a positive impact on economic growth.

Based on stronger Party leadership, China’s financial development strategy in expanding support for the real economy, financial supply-side reforms, and financial risk management is interpreted as an attempt to expand the Party Central Committee’s authority for more effective and concentrated use of financial resources, and as a means to successfully implement the transition of China’s economic growth paradigm. However, stronger influence by the Party suggests that China’s financial industry may function more as an important tool for the national development strategy rather than an open and market-oriented reform. This could potentially expand the influence of state-owned securities companies in the capital market, which is currently relatively open, enhance the Party Central Committee’s influence in financial risk management, and concentrate financial resources on state-owned enterprises and strategic national industries. In other words, China’s financial market and system may become more characterized by planned economy traits rather than an open, market-based financial system. Therefore, South Korea must closely analyze the methods and intentions behind China’s strategy to become a financially strong country and formulate counter-strategies.

Chapter 6 presents the following implications for South Korea, based on the findings of Chapters 2 to 5:
First, South Korea must develop effective strategy from an economic security perspective in response to China’s expanding financial support for strategic industries. China’s current financial development strategy is characterized by the reform of state institutions rather than micro-level market institutional improvements. This shows that China places significant emphasis on development and safety in the financial sector, linking this with national economic security. If China continues to increase long-term financial investment in national strategic industries through these reforms, it could enhance its competitiveness in advanced industries. As the Party’s influence over financial resources becomes stronger, the distinction between state-owned and private enterprises in China’s market is becoming increasingly blurred, and Party organizations may influence internal corporate decisions. Thus, South Korea must formulate meticulous strategy to respond to stronger influence by the state on China’s industrial sectors.

Second, South Korean financial institutions need to reassess their response strategies in light of changes in China’s financial market structure and institutions. Going forward, China’s financial market will be influenced by a combination of open systems and regulated market environments. The emergence of super-regulatory agencies, such as the National Financial Regulatory Administration, could lead to exclusive support for specific industries. To avoid potential harm to South Korean businesses and financial institutions in China, the South Korean government must maintain close consultations with Chinese authorities.

Third, there is a need for in-depth diagnosis of the effects of financial reform and proactive risk management. Despite China’s strong commitment to managing financial risks, recent measures may not fundamentally address the risks themselves. Therefore, South Korea needs to conduct an in-depth diagnosis of China’s financial risk management measures and identify potential risks to the South Korean economy, preparing proactive response measures.