Smoothing The Flow of Money

Smoothing The Flow of Money

China changes its investment and financing systems to solve longstanding problems for investors and companies By Wang Jun

China’s investment and financing systems will be overhauled in the hope of ensuring stable economic growth, adjusting the economic structure and improving people’s livelihoods. A new guideline outlining the reform measures was issued by the Central Committee of the Communist Party of China (CPC) and the State Council on July 18.

“This is the first document specifying changes to the investment and financing systems to be issued by the CPC Central Committee since the reform and openingup policy was adopted some 30 years ago,”said Zhang Yong, Vice Minister of the National Development and Reform Commission (NDRC), at a press conference on July 25. Zhang said that the document is as important as the State Council’s decision to push forward amendments to the investment system in 2004. “It will be a guiding principle on advancing supply-side reform in the investment and financing sector.”

By implementing the reform measures, a market structure with multiple players and a market environment for fair competition can be built. This would improve resource allocation, alleviate financing difficulties and lower financing costs for enterprises, according to Wu Qi, a research fellow at the China Minsheng Banking Corp. It would also help to create stable and efficient systems for investment and financing, easing up fiscal pressures on local governments and alleviating their debt burdens.

Cutting approvals

China’s investment and financing systems are shifting toward market orientation as opposed to being led by the government, according to Wu. “The reform will allow the market to play a decisive role in resource allocation to further stimulate private investment and improve the efficiency of the investment and financing systems,” said Wu.

There are a set of procedures that all prospective investors must follow, particularly for those looking into projects in special industries. An approval-based system has been used for many years in China and has functioned without a hitch in the past, said Zhang. Nonetheless, there are now some purely market-centered projects—especially small projects—which don’t involve important matters such as environmental protection. Zhang believes that such investments need not pass through a rigid approval system.

Based on the guideline, China will explore a new management model for investment. “For example, when buying color TVs, refrigerators and cell phones, we need only money, not approval,” he said.

According to Zhang, Guangdong and Zhejiang provinces are experimenting with such a model, and the NDRC plans to expand this system throughout the country, depending on the result of the experimentation.

Xu Shaoshi, Minister of the NDRC, said there are three conditions for the new model to be implemented: clear, complete and practicable development plans, technical standards and safety standards; a sound social credit system; and finally, comprehensive supervision and potential punishment measures.

Also, to improve management procedures, the guideline proposes the establishment of a one-stop assessment intermediary service. “Investors have com-plained that they’ve had to go through too many assessments and evaluations, which takes too much time,” Zhang said. “With this new system, we plan to gradually combine various assessments and evaluations for added convenience to investors.”

Integrating the various items subject to government evaluation and approval will be conducive to avoiding redundancy, improving administrative efficiency and reducing related fees, said Xu Zhaoyuan, a researcher with the Development Research Center of the State Council.

Qin Xingcai, President of Tianjin Lishen Battery Joint-Stock Co. Ltd., a hi-tech SME, introduces the company’s latest products at a business fair in Tianjin on May 22

Direct bank-corporate links

According to the new guideline, the country will carry out pilot projects allowing financial institutions to hold corporate stocks in appropriate forms. Zhang said that connecting financial institutions and companies more effectively is a problem that must be addressed, and that financial supervisory authorities have been carrying out experiments by learning from the experience of foreign countries.

The Law on Commercial Banks stipulates that commercial banks are not allowed to make direct investments within China, but leaves room for provisions by the State Council.

“By experimenting through allowing financial institutions to hold corporate stocks, we hope to give room to better connect finance with the real economy, so they can promote each other’s development,” said Zhang. “But the experiment must be carried out appropriately and in accordance with the law, and then be extended in the future.”

“Allowing financial institutions to hold corporate stocks will provide small and micro enterprises and startup companies with more channels for financing from banks,”said Guo Tianyong, a professor at the Central University of Finance and Economics.

Due to its low costs and high returns, Guo claimed that equity financing is becoming an important way for commercial banks to improve their profit capability and accelerate their transformation. On the other hand, commercial banks holding corporate stocks in appropriate forms will effectively cut out the middleman in the financing process and thus lower costs. This will meet Chinese companies’ demand for equity financing and improve the efficiency of investment and financing.

The guideline also vows to introduce innovation to financing systems and smooth funding channels for investment projects. This will be carried out by boosting direct finance, promoting the role of policy and development-oriented financial institutions, and allowing more investment channels for capital from insurance companies and pension funds.

How can financial capital flow more smoothly into the real economy? Two problems must be solved in order to achieve that goal, said Chen Jingwei, Deputy Director of the Investment and Financing Research Center of the Chinese Academy of Social Sciences. On the one hand, projects for investment must be profitable, and on the other hand, financial rules must be improved to guarantee the safety of capital.

“From a global perspective, China’s financial resources are well endowed—what we must focus on is fixing its system of rules,”Chen said.

Copyedited by Bryan Michael Galvan

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