Zhou Xiaochuan: The opening-up of Chinese economy - from
manufacturing industry to service industry
Keynote speech by Mr Zhou Xiaochuan, Governor of the People's Bank of China, at the 2017
Lujiazui Forum "Financial reform and steady development from a global perspective", Shanghai,
21 June 2017.
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Distinguished guests,
Ladies and gentlemen,
Good morning! It's a pleasure to attend the 2017 Lujiazui Forum. China has built a socialist
market economy to promote social and economic progress and reach prosperity through
competition and optimal resource allocation. During this process, opening-up has played a
significant role. I'd like to share my understandings of opening-up based on relevant international
and domestic experiences.
1. The opening up of manufacturing industry turned China into a world factory
The manufacturing industry of China opened up relatively early. There were different opinions on
opening in the early days, but it was relatively easy to reach a consensus. This made the
manufacturing industry an adequately opened industry. An observation on the opening-up of the
manufacturing industry showed that most industries which participated in opening-up and
competition early grew faster and became stronger eventually. Opening-up is a process of
optimizing the resource allocation by market force and competition mechanism.
Specifically, in terms of bringing in foreign capital,we opened up via importing foreign
products and inviting foreign companies to invest and build factories in China, which in turn
competed with domestic companies. Before reform and opening-up, Chinese companies had no
foreign competition and only little domestic competition. The pressure of competition has driven
industrial firms to make great progress.
In terms of going global, domestic firms compete with global players via export and doing
business internationally. At the beginning, Chinese companies rarely participated in international
competition and only exported commodity related products. In the 1980s, very few believed that
Chinese manufacturing products export could have a bright future. As a result of opening-up,
both processing trade products and manufactured products were able to compete globally and
domestic firms started to go abroad. Instead of losing the competition, Chinese manufacturing
industry and Chinese firms experienced fast growth. China became a leading
manufacturing country and gained the reputation of world factory. Many industries have been
moving to the higher end of global value chain.
It is competition that breaks up monopolies. There was a less competitive environment in China,
especially among the foreign trade enterprises. Foreign trade companies, including Sinochem,
China Minmetal, COFCO and etc. were divided by sub-industries, such as agricultural and
animal husbandry, textile, light industry, machinery, and so on. They were in charge of import and
export of their respective sub-industry and adopted different financial rules. There was no
competition among the companies. In order to attract foreign investment, China introduced the
first Sino-foreign joint venture Law in 1979, after which domestic companies competed from
foreign companies and industry segmentation and monopolies began to fall apart.
Competition has driven the SOEs to make great progress. Industries with more sufficient
opening-up and fiercer competition have developed more rapidly. The manufacturing industry has
flourished.
2. Opening-up has promoted domestic policy reform
The opening-up has strongly impacted the traditional centrally planned policy making system,
and triggered a series of major domestic reforms, including pricing system reform, value-added
tax reform, export tax refund reform, market-based exchange rate regime reform, and negotiation
for accession to GATT and WTO. In the early 1980s, in order to attract foreign investment, the
domestic policy system must move more closer toward the market rules and provide a level
playing field. Subsequent consideration was to make sure Chinese enterprises compete fairly in
the international market.
Fair competition and opening-up are inter-connected. It involves not only competition between
Chinese and foreign-funded companies, but also equal and adequate competition among
Chinese companies. Opening-up accelerated the access of domestic private capital, and
subsequently brought in the concept of national treatment. Market access criteria should be the
same for domestic and foreign-funded companies. The opening-up facilitated three major policy
reforms, i.e., trade and investment liberalization, market-based exchange rate regime reform,
easing of exchange control, including lowering the market access threshold. As a result,
competition and market gradually became generally applicable policy mechanism.
3. Service industry has opened up in a similar process
In the past, economists treated the service industry as a non-tradable industry. However, with the
rapid progress of information technology, transportation and globalization, many services
became tradable. People began to say that "the world is flat". The opening-up of the service
industry in China followed a similar pattern of the manufacturing industry: opening-up brought in
competition, boosted efficiency and quality of service, and facilitated domestic policy reform.
In the industrial field, the market competition rules are not applicable to a very small number of
industries such as defense industry, but most industries can open up and bring in competition. In
the service sector, there are also sensitive industries, and some services can't be delivered
across the border. Thus, the market mechanism cannot cover all of them. But most other
service industries can open up. The understandings of service industry opening-up and the
necessary policy reform followed a similar process like that of manufacturing industry. The
opening up to foreign capital started in industries such as hotels, restaurants, transportation, and
etc., and expanded to other service industries. In terms of Chinese services going global, the
export products and their after-sale service of industrial companies were the first, followed by
banking, insurance, medical, shipping, tourism, software, retail, payment, cultural services,
and etc. Shanghai's shipping industry is a typical example.
4. The experience of regional pilot programs has enhanced the confidence in
openingup
In the early days, decisions were made to open up and develop four special economic zones,
and there were different opinions at that time. Later on, the successful experiences of special
economic zones were introduced to other places. There were also different opinions
regarding China's accession to the WTO, but fact has proved that the WTO membership had a
profound and positive influence on China. The government advanced the experiment of Shanghai
Free Trade Zone (FTZs) after the new leadership took office. There are 11 FTZs now. Many
experiences from the FTZs have been applied nationwide, the benefits of opening up has been
tangible and well recognized.
5. Financial service sector is a competitive service industry
Finance is an important component of the service industry, as reflected in its weight in the WTO
negotiation and in Chinese statistical system's classification of service industry. Finance
is regarded by many at the core of any modern economy. In 1993, at the third Plenary Session of
the 14th CPC Central Committee in 1993, the financial industry was described as the lifeline of
country's economy. I think this can be attributed to the background at that time. First, the financial
sector, especially the banking industry, played a prominent role in resource allocation; second,
with each specializing in one field, there was little competition among the four specialized banks
in the banking industry; third, big financial institutions still undertook policy-related businesses
and were not operating fully on a market-basis; fourth, the absence of stability in the financial
sector might trigger major chaos. Would this affect the market nature of the financial industry? Is
financial industry a competitive service industry?
In 1990s, according to the 50 articles specified in the third Plenary Session of the 14th CPC
Central Committee, the policy functions were split from specialized banks and formed
independent bodies; four specialized banks were turned into full service commercial banks in the
competitive market. The Third Plenary Session of the 18th CPC Central Committee has made it
clear that the market would play a decisive role in resource allocation, meaning all important
functions should adopt a market approach. We have learned the lessons from the
global economic crisis that, to prevent financial crisis, we should first guarantee the healthiness
of financial institutions, and never tolerate high leverage, low capital adequacy and large chunks
of non-performing loans. When an environment is not open and competitive, it tends to tolerate
low standards. Thus, the attribute of financial service industry as a competitive service industry in
the market economy is obvious.
According to global experiences, most financial industries are competitive service industries.
When foreign banks were first introduced into China, the initial aim was to bring in foreign
capital. Looking back, domestic commercial banks have learnt a lot from competition, resulting in
a series of changes in the financial industry, including product evolution, market building,
business models, management experience, and etc. Later, competitive joint stock reform and
listing have elevated the operation efficiency, asset quality and governance of Chinese banks.
The entry of foreign-funded banks also exerted reform pressure on domestic policy reform,
including accounting standards, supervisory standards, replacing business tax with value-added
tax, and etc.
For consideration of their own interests, some individuals advocated protecting the financial
industry to enable it to grow stronger before opening up the market, and then allowing these
banks to participate in international competition. Experiences from many countries (including
China's own experience) show that protection tend to create problems such as laziness, soft
financial constraint, rent-seeking, and etc., damage the competitiveness and the industry's
development, and the market and institutions end up becoming unhealthy and instable. One
example is what happened before and after the Asian financial crisis.
Nowadays, many Chinese financial institutions have gone global and adapted to international
competition. Their risk management, pricing and anti-money-laundering have had gone through
substantive changes. Today, five Chinese financial institutions have become global systemically
important financial institutions and operate soundly on a commercial basis with adequate capital.
The sound development of China's financial market has attracted attention of agencies that
compile international bond and emerging market stocks indices. These all show that financial
service industry, as a competitive service industry, has benefited from opening-up and needs
further opening-up.
6. The Belt and Road Initiative provides new opportunities for financial sector
openingup in China
Given the positive reaction China received after the introduction of the Belt and Road Initiative,
various Government ministries has pushed the implementation of relative policies. The initiative
is an approach to opening-up and involves many new patterns of financial cooperation which
requires further opening-up. It will also provide new opportunities for China's financial sector
opening-up and international cooperation.
Development finance can play a positive role in the initiative. China has explored the development
finance as a financial model to better serve national strategies. It operates independently and is
based on market principles. The model emphasizes long term investment and relies on credit
support instead of government subsidy. It only requires marginal profits with principal protection
which is also financially sustainable. This model can play a greater and more active role in the
initiative and will help avoid various problems, such as the crowding out effect, moral hazard and
market distortion. The construction of the Belt and Road could provide extra room of
development to financial institutions, for them to open offshore branches and provide better
financial services for trade, investment and capital management.
In short, looking back at the reform experience at home and abroad, we have a better
understanding of and stronger confidence in opening up and are determined to continue
openingup. Based on the opening-up experiences of both manufacturing and service industry, it is
reasonable to conclude that the rule of competition and opening up also apply to the financial
sector. The financial sector is no exception. In the process of the opening-up, competition will
bring pressure, motivation, progress and prosperity, and financial industry will have a brighter
future.
I am confident that with support and concerted effort, China's opening-up will move to a new
level, the experiment of SFT and its experiences will spread more widely, and Shanghai will
make new achievements in building an International Financial Center.
Thank you all.