The plight of Wenzhou's reform project could determine the nation's future
Hu Shuli says a strategic push by the central government will hold the key to the effective implementation of financial changes on the ground
Wenzhou has been implementing financial reform for just one year, but its progress is attracting attention.
The State Council decided last year to set up this pilot region for comprehensive financial reform, with the aim of accumulating experience for the country.
Wenzhou launched 78 projects to reform its financial organisations, service sector, regulatory system and capital market. Some achievements have been made, resulting in the formation of some small financial companies, rural banks, private lending centres, and a property rights trading market. In particular, the Wenzhou Index, compiled to gauge the activeness and prices of the local private financial market, has gained recognition.
However, experts remain cautious about the effectiveness of the reform, while the local business sector has yet to feel any changes. During the National People's Congress and the Chinese People's Political Consultative Conference sessions this year, the mayor of Wenzhou admitted that the reform had fallen short in three ways. First, progress had failed to meet public expectations; second, the service sector had failed to fulfil the needs of small and medium-sized enterprises; and third, the regulatory system could not effectively monitor private lending activities.
Some scholars pointed out that Wenzhou, as a financial reform pilot region, does not even have a private bank, while neighbouring Taizhou already has three.
In short, the results of Wenzhou's reform have not been satisfactory. A top-level design for reform is needed. When the reform process began, goals were set by the central government to build a diversified financial system to align with economic and social development, which reflected the project's ambition.
Wenzhou was among the first mainland cities to experiment with the market economy. But the development of its financial industry has been uneven and the regulatory system unsound. Inherent flaws in the Wenzhou model became apparent in the wake of the global financial crisis.
Breakdowns in SME funding and an exodus of business owners led to economic and financial turmoil in the second half of 2011, which local observers attributed to two situations. One was excessive funding in the private market and irrational financing. The other was that too many SMEs had lousy investment strategies.
When the government eases monetary policy, state-owned banks lend excessively. When the government tightens it, private financial firms take up the role of banks. When banks withdraw or cut loans, firms reach a dead end. This is irrational financing. Meanwhile, faced with falling profit margins in the midst of fast but inefficient economic growth, firms raise funds using their assets to engage in real-estate investment, mineral development and even speculation, thus weakening the economy. This is what we call lousy investment strategies.
Financial reform provides ample opportunities to end these distortions.
Such progress would bring financial services in line with economic development. Wenzhou is a microcosm of the mainland economy, and the experimental results achieved there are of universal value and can also be considered national standards.
However, the financial industry is the lifeblood of the modern economy, and financial reform can create a domino effect. Wenzhou's financial reform focuses on the diversification of the financial system, but liberalisation of interest rates, which is closely related to the development of the private financial sector, is not included and has been put aside until the launch of a basket of reforms from the central government.
Meanwhile, many specific measures involved in the reform are related to existing laws and regulations, industrial policies and regulatory rules. Under the pilot principle, where the risks are acceptable, some control measures can be relaxed and some administrative powers delegated to provincial and municipal governments. The central government needs to make decisions on these issues as early as possible. Reform pioneers cannot move forward otherwise.
Wenzhou should set clear targets for itself. This does not lie in calculating how many new financial institutions are formed, but in how private capital is encouraged and guided to the financial sector, and how the financial industry can contribute to the economy, as well as how the methods of raising funds could be changed indirectly through banks.
There are three standards to determine how successful the financial reform in Wenzhou will be. The first is whether the cost of financing has returned to a reasonable level or the average profit margin of society. The second is whether financing channels for firms work well and conveniently. The third is whether the economy is back on a normal track.
These standards can be used to assess the success of Wenzhou's reform and the effectiveness of China's economic transformation.
Financial reform won't happen overnight and is not a panacea for all economic ills. But it is critical now to a Chinese economy that is slowing down its pace of growth. As one of 10 pilot regions for such reforms, Wenzhou needs support from the top to press on. The central government must map out its strategies.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com