Q&A: Getting to grips with China's financial system

What’s going on with China’s economy, and what should New Zealanders know? In this series, the Asia Media Centre speaks to experts about aspects of China’s diverse economy, from consumers to financial systems to investment.

Zhaohua Li is a Senior Lecturer in Finance at Lincoln University. She shares her insights on what makes China's financial system so unique and why more Chinese banks are looking to New Zealand. 

What is the big picture or trend for the financial system in China right now?

Zhaohua Li: Currently China is having a negotiation with the US on trade, so that’s to a large extent driving the Chinese economy this year. In order to get a better deal for both parties, China is trying to speed up their reforms. A recent example is they lifted the quota for the Qualified Foreign Institutional Investor scheme. Before that, any foreign institutional investor that wanted to invest in the Chinese stock market and bond markets needed to apply for a limited quota, but now they’ve eliminated this quota system. It’s all positive signalling to the outside world that China is further opening up its economy to other countries — China is speeding up its economic reforms.

What distinguishes China’s financial system?

The financial system is distinguished from western countries in that there are a lot of state-owned banks as well as state-owned enterprises. This state-owned enterprises and banking system, from a Chinese government perspective, means they can assert political influence or non-commercial objectives into the financial system.

How does that influence corporate behaviour in China?  

Because the government has tight control in some of the state-owned banks — not all banks, we still have private banks — and also the state-owned economy, obviously this will breed some political connections between corporate and government. The political connections are supposed to benefit both parties — the government and the corporates. Some of the research shows that if government officials have achieved good economic growth for their province under their tenure, they are more likely to be promoted to the next level. The government can direct some of the resource allocation to the state-owned enterprise, and those enterprises, which can be quite big and influential, are able to make economic growth in that province to be faster, and faster economic growth within that province will also give the officials better promotion chances. That’s probably unique in China.

So how does the system respond to financial shocks?

Relatively speaking it’s less sensitive to unexpected shocks because China has capital control. If the shock is from outside China, they can use international currency control to mitigate that external shock. If the shock is within China, because China is basically government by one ruling party, the party has a very big influence. They are more cushioned to deal with shocks internally and externally.

What’s happening with the banking system? There’s been some coverage about whether banks are engaging in risky behaviour.

At least in the main state-owned banks, this is probably less of an issue.

A lot of the negative news about the financial system is about peer-to-peer lending platform collapse. Peer-to-peer lending is really risky and to be honest, China does not have a very good regulatory framework for those kind of financial innovation products (or new financial instruments or technologies like peer-to-peer lending, crowdfunding, digital currencies such as Bitcoin, Robo-advince on investment). There’s a lot of financial innovation going on because the existing system does not satisfy the financing needs of Small and medium-sized enterprises (SMEs) or the needs of the individuals. That’s bred a lot of room for financial innovation products. The regulation is not able to fully capture the growth in that area, but it’s not the mainstream banking system.

Do you see the situation as risky or under control?

It’s quite risky. From a regulatory point of view, on the one hand they really encourage financial innovation. On the other hand, they care for the safety of the banking system. As I said, the banking system is tightly controlled by the state, especially state-owned banks. There is not so much financial innovation going on. Financial innovation is mainly going on outside the regulatory system because it’s less controlled and regulated. Its growth is very fast. SMEs usually couldn’t get the credit from the state-owned banks, so they need those innovative financial products. But its relatively less regulated, so the risk is quite high from my point of view.

Why are some banks from China are becoming more active in New Zealand?

I think that’s China’s bigger plan for the Chinese yuan — the Chinese renminbi — to be more of an international currency. They want to internationalise the yuan to make it a more popular currency worldwide. That’s the big picture. Because they want people to use the Chinese yuan, therefore they need to set up some overseas banks or branches to facilitate the use of Chinese yuan. Of course, when they set up new banks overseas, they cannot just do business in yuan, they also have do local business. They need to do business in New Zealand, so they have to engage in New Zealand banking.

The main thing is that as China’s economy continues to grow and Chinese enterprises go global, they need to set up Chinese companies in New Zealand and will need the banking system whether it’s New Zealand banks or Chinese banks set up in New Zealand for Chinese yuan business. So that’s bigger picture.

Do you think that trend will continue?

Yes. In addition, China is currently gaining market share from mobile payment systems like Alipay. Fintech is reshaping the financial landscape globally, not just in China. But China is particularly good in terms of mobile pay because in China the state-owned banks couldn’t satisfy the mobile pay needs. So therefore a lot of companies like Alibaba and WeChat are. Because of those opportunities they are getting more advanced in terms of mobile pay systems. So now they are wanting to go more global to capture the market share.   

Interview by Rebecca Townsend. 

 - Asia Media Centre