‘China’s Dream’ of a New Financial Market

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Bao Jia Tan's picture

The subject of whether new governments matter for financial markets raises two meaningful questions. One, it challenges us to identify whether the changes in financial market performance and structure after government transitions are due to a meaningful association with the "new government leaders"; and two, if there is an association, in the more likely case of a multi-causality situation (i.e. that the new leadership is one of the many factors that affected the financial markets), whether it was a major contributing factor or one that could have been substituted easily.

This essay argues that the relationship matters to a moderately large extent because the financial sectors of many economies, especially Asian ones, continue to be highly regulated by the government. Furthermore, the unpredictable political scene means that investors continue to look to the new leadership for an idea of how the financial market would perform. Key management appointments made by the leadership becomes crucial hints, and the political interests of leaders also shed light on the direction that would be taken. Often though, the ability of the new leadership to achieve the intended changes is constrained by opposing political or business interests, by the lack of resources, and by the realistic needs of the economy. In other words, one could say that new leaders do not matter as their efforts run futile against these constraints. That said, many examples continue to prove that new governments do matter, especially in Asia, because the legislation structures of many Asian government centralizes power at the top.

To illustrate the point, we use China as a case study. At the National Party Congress in March 2014, Xi Jinping and Li Keqiang laid down their plans to overhaul state-dominated financial institutions, liberalize interest rates, expand the financial markets, and eventually make the renminbi freely convertible. Substantial efforts were then made in three areas – one, in regulations; two, in the appointment of individuals at the helm of major regulatory committees; three, in aligning the political interests with changes in the financial markets.


Regulatory Changes

The first significant claim that has been fulfilled is the emergence of a registration-based IPO system[1]. Late last year, the China Securities Regulatory Committee (CSRC) issued the long awaited rules for the system, and this new system is expected to be pilot tested this year, then fully rolled out in 2016 or 2017. For China, this shift away from the current approval-based IPO system means that small-medium enterprises get another avenue to raise capital, and private equity firms get another option for exits.

Another major change is in the China Banking Regulatory Commission's (CBRC) approval of five new private banks (Table 1) and the allowance for Internet P2P finance to grow. These efforts are part of Xi's promise to instill competition into the state-controlled banking industry and allow for more financial innovation. Indeed his leadership had been crucial here after opposing calls especially from the traditional banking sector. The efforts are significant as the availability of these alternative lenders for SMEs and alternative avenues for consumers to park their money for higher returns (Table 2) show the government's intent towards interest rate liberalization.

Table 1    Five private banks approved by the CBRC


Major Shareholders



Small and Micro Financial Services Group (owned by Alibaba) 30%, Fosun Group 25%, Wanxiang 18%, Ningbo Jinrun AMC 16%


Shanghai Huarui Bank Co.

JuneYao Group 30%, Metersbonwe 15%

Shanghai Free Trade Zone


Tencent 30%, Baiyeyuan Investment Co 20%, Shenzhen Liye Group 20%

Shenzhen Qianhai

Wenzhou Civil and Commercial Bank

Chint Group 29%, Huafeng Group 20%


Tianjin Golden City Bank

Huabei 20%, Maiguo 18%


Source: China Banking Regulatory Committee (CBRC)

Table 2    Interest rates of various financial products

Financial Instrument

Annualized Return

Minimum Investment (Rmb)

Maturity (Years)

Market size (Rmb Trn)

Wealth management products





Trust products





Money-market funds





Demand deposits





Time deposits





Source: Bankrate.com.cn


In line with this, Central bank governor Zhou Xiaochuan announced in mid-2014 that the liberalization of interest rates on bank deposits could be expected to complete within two years. This is the first time such a clear timetable has been given, and it is a bold move, considering the relatively longer period most reforms take. Yet this is a crucial final step in the deregulation of Chinese interest rates, and is a strong signal the new government is sending to the market.

Coupled with the liberalizing of the financial markets are SOEs reforms – specifically the emphasis on "mixed ownership" (hunhe suoyouzhi), and the restrictions on government-backed loans. Xi's words at the 2013 Third Plenum paved the gradual way for SOEs to seek private investments as local governments face limitations in their ability to act as guarantors to SOEs in bank loans. At the central level, the State-Owned Assets Supervision and Administration Commission (SASAC) announced this January that the Power Construction Corporation of China would be transitioning from being 100% owned by SASAC to partially-owned by eight different investors. Not falling behind, local level governments have also taken firm actions. In Shanghai, Hony Capital, a private-equity firm, bought a 12.4% stake in Shanghai Jinjiang Hotel Development owned by the Shanghai government. In Heilongjiang where state presence is strong, "mixed ownership" policies have been drafted into the 2014-15 plans, and the goal of letting 60% of SOEs achieve mixed ownership status within three to five years had been set; in Guangdong and Guizhou, new regulations now allow for zero government shareholdings in SOEs. Evidently, the direction of the new leadership mattered to a large extent.

Finally, a significant move towards the full convertibility of the Yuan and cross-border use of the currency is the setting up of the new offshore Yuan clearing centers in Frankfurt and Australia in March and November 2014 respectively. These would add to existing presence already in Hong Kong, Taipei, Singapore, Seoul, Paris and London.


Changes in Appointments

Aside from regulatory changes, the appointments of those at the helm of regulatory committees are crucial indicators to the sustainability of financial reforms. In Xi's case, his appointment of Lou Jiwei as Minister of Finance – after Lou was previously rejected by Premier Wen – gave confidence to investors that reforms would be sustained because of Lou’s reputation as a forceful reformist. Adding to that, the unexpected retaining of Zhou Xiaochun beyond retirement age as Central bank governor also proved Xi's intention to control the financial market as Zhou has long been an advisor to Xi's economic plans.

Third, the appointment of Liu He, previously a close economic advisor to Xi, as head of the Finance and Economics Leadership Small Group (FELSG) of the central Communist Party is significant too as the role requires the drafting of the official documents for five year plans for the party. Indeed, many of the frameworks for financial reform abovementioned were part of the plan drafted by Liu.

Finally, Xi and Li also oversaw changes in the management of state agencies such as SASAC. For the first time, a chief accountant role was instilled in its top management as a sign of its transition from the manager of SOEs to the manager of state capital and assets. This is in line with the push by Xi and Li SOEs to be owned by non-state actors but to be regulated by the state from a higher level.


Aligning Political Interests with Financial Reforms

A final reason to why new governments really matter for financial markets is that new governments often are concerned with political legitimacy and control, which they try to gain through management of crucial mechanisms in the nation’s economy. In the case of China, understanding Xi's need to take down old cadres like Zhou Yongkang would hint at the demise of the oil and gas industry where Zhou had been deemed as Godfather. Xi's efforts in the economic and financial reforms are no doubt aligned with his high-profile anti-corruption campaign that has been deemed by many as a political attempt to secure control over the party. In other words, the new leadership matters for China's financial markets because his political ambitions would drive him to make sure financial markets work in his favor.


Dealing with Constraints

Some might posit that reforms in China have always been present, rendering new leadership a small factor for consideration. Yet the evidence shows that Xi's political agenda and his ability to flex his political muscle has impacted the direction and strength of reform. A more likely opposing argument might be that constraints due to macro-economic situations might limit Xi's ability to influence the financial markets the way he wanted to. For instance, recent news have pointed out how Beijing has quietly pushed back the timeline for the Yuan to become freely convertible, as authorities fear that it could lead to damaging speculative flows that would hinder the structural reshaping of the economy.

That said, Xi and Li have made some hard decisions to date that suggest their determination to make the intended reforms work. Their situating of like-minded allies in the key roles have no doubt given them a supportive team to aid them in their efforts. In any case, even while constraints exist, policy reactions have often been influenced by the intentions of the leaders. Especially in the case of Asia where many market factors (interest rates, exchange rates, financial instruments) continue to be controlled by the government, the new leadership would continue to be an important force to be reckon with when it comes to understanding the financial markets.





[1] Under an approval-based system, regulators decide whether companies can list based on their perceived profitability. Under a registration-based system, regulators determine whether companies have met the standards for financial and legal disclosures before they are allowed to list.