China’s financial system is still relatively closed. Banks account for a big part of the country’s financial assets and most financial institutions serve mostly domestic companies.
As the economy slows, adjustments are necessary to support its financial infrastructure.
In the long run, financial reform will benefit the economy and the domestic financial industry.
However, in the short term, reform will bring uncertainty, especially for cross-border businesses.
To mitigate financial risk during the reform process, the government should allow more Hong Kong financial companies such as brokers, insurers and fund managers into the mainland.
The move could help mainland companies prepare for the full opening of the economy. Meanwhile, these companies could build an indirect channel via Hong Kong to financial facilities and capital in other parts of the world.
China’s stock market is growing rapidly. From 2011 to 2015, compound annualized growth was 42 percent and market capitalization hit HK$6.4 trillion (US$775 billion) in 2015.
The involvement of foreign or Hong Kong brokers in the mainland is restricted.
Mainland authorities should consider allowing Hong Kong brokers to expand into the mainland market for, say, initial public offerings, with lower required registered capital threshold.
In addition, most mainland fund houses put the bulk of their funds in domestic assets.
In 2014, assets under management by domestic funds were 6.7 trillion yuan (US$790 billion), with individual investors being the dominant source.
Mainland families have an average of 7 percent of their wealth in those fund houses.
As a temporary measure, foreign-domiciled fund houses could be gradually allowed in, enabling regulators and domestic investors to better understand international practices and related risks.
In addition, a developed insurance industry is essential to the development of the financial services industry.
The Chinese insurance market is the fourth largest in the world and the second largest in Asia but its penetration rate is still quite low.
The mainland could allow Hong Kong banks’ mainland branches to sell Hong Kong insurance products.
It’s noteworthy that China is planning to boost insurance penetration rates to 5 percent by 2020 from 3.2 percent at present and increase insurance density to US$500 per person from US$235.
Hong Kong can play a key role in China’s financial reform. Mainland companies will then be able to raise money from the international market.
This article appeared in the Hong Kong Economic Journal on April 22.
Translation by Myssie You
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