Zhang Monan
Rights and roles of creditor
By Zhang Monan (China Daily)
Updated: 2010-08-27 08:54
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Offshore renminbi businesses and sound domestic financial markets could help China safeguard its core interests
China has scored a number of remarkable achievements in its foreign financial business over the past three decades. It has developed from being a country with insufficient reserves and a capital importer into the world's largest foreign reserves holder and net capital exporter. It has also successfully discarded its "debtor" identity and evolved into the second largest creditor in the world.
Such changes have produced some profound influences on China's integration into globalization, but a string of problems and dilemmas have also been exposed in this process. China still remains a fledgling global creditor despite its status as the world's second largest economy, in size only. How to boost its deserved status as a major world creditor, restructure its unreasonable financial assets composition, acquire a larger voice in the international financial order and reverse the trend of accelerating imbalanced distribution of global wealth are immediate priorities.
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In its 12th Five-Year Plan period (2011-2015), China should consider how to act as the largest holder of US debt and how to transform its creditor status into advantages that help raise its voice in the global financial market. To this end, measures should be taken to internationalize the renminbi.
As a first step toward internationalization of its currency, China should gradually increase the renminbi's role in international trade settlement, and then try to forge it into a major international investment and reserve currency. In the short term, channels for the renminbi's overseas investment and financing should be framed in a bid to promote the country's industrial growth through expansion of its local-currency financial capital. The range of the renminbi's overseas pricing, settlement and circulation should gradually be extended, to raise China's status as a global creditor.
In its push for renminbi capital account convertibility, effective measures should be taken to develop a renminbi offshore financial market and Hong Kong's status as an international financial center should be leveraged to enrich the renminbi's role in overseas investment, financing and reserves. In addition, the country should take the necessary measures to open domestic renminbi bond issuance to overseas financial bodies and allow outbound renminbi to invest in the domestic bond market, as a step toward expanding the renminbi's international circulation and boost the country's status as a global creditor.
China should also accelerate the reform of its domestic financial institutions and push for the construction of a fully fledged homegrown financial market. China's low status in the international financial order is closely related to its underdeveloped domestic financial market. Despite its bulging foreign reserves and its status as the world's second largest creditor, there is still a wide gap between China and developed countries in terms of the distribution of financial assets and resources and their organization and management.
The country should try to rectify the fact that the government foreign assets have long dominated its enormous foreign reserves by giving a larger role to corporate and private foreign assets. A unitary reserves structure will be disadvantageous to diversification of its foreign reserves capital export.
At the same time, measures should be taken to facilitate the cultivation of a homegrown financial market and establish an open mechanism aimed at promoting the smooth conversion between investment and deposit, in a bid to increase people's incomes and push for a more reasonable distribution of national wealth.
In addition, the country should reduce its bonds investment and increase equity investment and production-focused investment. To this end, China should continue to push to change its foreign credit structure from financial investment to industrial investment. As part of its foreign assets investment, equity investment will better reflect its capital radiation ability and help cultivate new points for the country's economic growth. At the same time, China should actively adjust its foreign assets structure, and transform its capital advantages into those for investment, through a well-planned global capital distribution strategy, in a bid to seek a more reasonable redistribution of global interests.
To facilitate the process, a special national strategic foundation could be set up to combine part of the country's foreign reserves with its national development strategy to boost its comprehensive competitiveness.
Since the global financial crisis, China has accelerated probes into how to raise its national competitiveness, including how to gain a lager market, and more resources and key technologies from other countries and how to raise domestic enterprises' competitiveness in international markets. As an experimental step toward this target, China has explored how to use its colossal foreign reserves to aid the restructuring of its State-owned commercial banks.
Despite its explorations, the country still lacks a well-designed and comprehensive strategic arrangement for the reasonable use of its enormous foreign reserves. As a move to change this situation, some special foundations should be set up to aid the national energy strategy and to promote technological innovation and domestic enterprises' overseas industrial acquisitions.
The author is an economics researcher with the State Information Center.