Direct finance push for optimum effect
China Banking and Insurance Regulatory Commission recently released a document urging banking and insurance companies to play an important role in optimizing the country's financial structure.
It also said that the proportion of direct financing will be increased and multiple channels used to convert household savings into long-term funds in the capital market. China's direct financing proportion has been relatively low, and social financing relies heavily on banks.
This over-reliance on banks creates financial risks for the entire financial system. At present, direct financing accounts for 15 percent of social financing in China, with equity financing accounting for only about 5 percent. This structural problem should be corrected by developing direct financing.
However, public focus seems to be on "promoting effective conversion of household savings into long-term funds in the capital market through multiple channels", as many believe it is equivalent to investing in stocks.
But the capital market comprises stocks, government bonds, as well as corporate bonds.
Also, to convert their savings into long-term funds in the capital market, individuals do not necessarily have to invest in stocks. They can channel their savings into annuities, financial products and trust funds in the capital market.
Thanks to China's rapid economic development, residents' wealth has grown rapidly since 2000, but the lion's share of that wealth has gone into buying homes or investing in stocks.
This housing-focused investment behavior has given rise to asset bubbles and brought consequences for the macroeconomy. When real estate investment turns cold, household savings need new investment channels.
Over the past 30 years, the stock market has failed to help the majority of investors increase their wealth. A volatile stock market has also affected its financing operations.
Chinese people need safe and sustainable long-term investment channels. Therefore, it is necessary to vigorously develop investment institutions and give residents the choice of long-term investment through channels such as annuities, financial products and trust funds.
This can help expand direct financing and give people more choices to tap international financial services, which will make the domestic financial institutions more competitive.
