Diversified financing structure integral to building economic powerhouse

At present, China's monetary policy remains supportive and relatively loose, with major interest rates hovering at historic lows. The low interest rate environment is expected to persist for some time, making the high-quality development of China's capital market particularly important.

From both domestic and international experience, monetary tightening can effectively curb rising prices, but monetary easing is less effective in tackling sluggish prices because the latter usually involves structural issues that must be addressed through targeted structural reforms.

Understanding the current Chinese economy and its policy choices requires acknowledging both external uncertainty and the pressure of shifting growth drivers. These are challenges faced on the path of progress.

Overcoming them will require accelerating the creation of a new development paradigm, fostering new quality productive forces suited to local conditions, and achieving high-quality growth, all of which depend on a robust and efficient capital market.

China's financing structure remains imbalanced, marked by heavy reliance on debt and a lack of equity. Increasing the share of direct financing, particularly equity financing, has long been a central goal of financial reform.

The Central Financial Work Conference at the end of 2023 reiterated the need to optimize the financing structure and strengthen the capital market's role as a hub of resource allocation.

From last year, different high-level meetings all emphasize the importance of enhancing the attractiveness and inclusiveness of domestic capital markets, and policymakers have sent a clear and consistent signal of support.

The capital market's built-in mechanisms of risk sharing and benefit sharing help promote a virtuous cycle among industry, technology and capital. Whether nurturing emerging and future industries or upgrading traditional sectors through innovation, all rely on the capital market for support.

Recent regulatory measures, such as rules on sci-tech innovation and mergers and acquisitions, have provided institutional safeguards for capital markets to serve the real economy's high-quality development.

As a super-sized economy, China must and can rely on internal circulation. Expanding domestic demand, especially boosting final consumption, is the only viable path forward.

Consumption is a function of income, and property income is one of the four main sources of household income.

The 14th Five-Year Plan (2021-25) called for increasing property income among urban and rural residents through multiple channels. Earlier this year, a special action plan to boost consumption further emphasized the need of broadening channels for property income.

At present, most household wealth in China is concentrated in real estate, with relatively few movable assets. Among movable assets, deposits still dominate, while non-deposit financial assets such as stocks, funds, bonds and insurance, remain underrepresented.

As the policy of "housing is for living, not for speculation" continues, household asset allocation is becoming more diversified, shifting from real estate to financial assets, and within financial assets, from deposits to market-based investments.

China now has introduced a series of measures to improve listed company quality, encourage dividend payouts, attract long-term capital inflows, promote the high-quality growth of the mutual fund industry, and strengthen investor protection.

These reforms aim to optimize the capital market ecosystem on both the financing and investment sides, enhancing its internal stability and allowing households to share in the dividends of China's economic growth through the capital market.

At the same time, ongoing capital market reforms are guiding institutional investors toward more rational, long-term investment behavior, striving to deliver sustainable and stable returns.

Compared with those in Japan and Europe, the effectiveness of the United States' zero interest rate plus quantitative easing policies lies in the structure of its financial system, where about 80 percent of financing is direct and 20 percent indirect.

In Japan and the eurozone, the ratio is roughly half and half, while in China it is closer to 30 and 70. In the US, low interest rates transmit effectively through stock and bond markets, generating strong wealth effects that stimulate investment and consumption.

In China, however, even if the stock market rises in response to monetary easing, the wealth effect remains limited because households hold relatively few stocks.

Capital markets in Asia have long suffered from an imbalance between equities and bonds, with debt financing dominated by bank lending. This reliance means that any banking crisis risks paralyzing the broader credit system.

One key lesson from the Asian financial crisis was the importance of developing vibrant bond markets. China faces a similar challenge. Although corporate bond financing costs have fallen, issuance of credit bonds remains limited, and a weaker economic environment has made bond financing even more difficult.

As a result, firms continue to rely primarily on bank loans. Yet the transmission of low interest rates through bank credit channels is often obstructed: the real economy lacks sufficient effective demand for credit, while banks are cautious in extending loans.

The phenomenon of "companies reluctant to borrow and banks reluctant to lend" is neither unique to China, nor new. Only by expanding direct financing through both equities and bonds, and by developing a multi-tiered, diversified financing structure, can China enhance the resilience of its financial system, ensure funds flow more efficiently into the real economy, and improve the transmission of monetary policy.

At the end of 2023, the Central Financial Work Conference for the first time called for accelerating the building of a financial power. Finance is the lifeblood of the national economy and an essential component of national competitiveness.

Strengthening the financial sector is therefore integral to building an economic powerhouse. Among the six key pillars of a financial power, a strong currency ranks first.

Achieving a global status for the renminbi that matches China's economic influence lies at the heart of building a strong currency and supports the other pillars of financial strength.

The renminbi's use for pricing and settlement is the foundation of its internationalization, while its investment, financing and reserve functions represent higher levels of global use. These goals depend on advancing high-level financial openness, especially institutional openness in capital markets.

Institutional openness involves not only "border opening" through national treatment and negative lists, but also "post-border opening", aligning domestic rules, regulations, and standards with international norms.

China's capital market is a product of reform and opening-up. In fact, reform is in the country's DNA, and openness is one of its defining features.

China must continue to combine international experience with domestic realities, balance development and security, and advance comprehensive, deep reform and opening-up of its capital markets.

By improving fundamental systems, China can further integrate technological and industrial innovation, while better supporting and attracting overseas entities to use the renminbi for cross-border investment and financing.

The writer is global chief economist at investment bank BOCI China.

The views do not necessarily reflect those of China Daily.