BEIJING, Oct. 9 -- Although the United States believes the Chinese currency should be given a larger fluctuation margin and the renminbi should be further appreciated, Henry Paulson, the U.S. treasury secretary, showed far less concern over renminbi's revaluation than his predecessor John Snow, during his China visit in September.
Instead, Paulson urged reform and the opening up of China's financial market in every speech he delivered during his recent visit.
He was making people believe that speeding up the opening of China's financial market serves to co-ordinate the Chinese-U.S. economic relationships fundamentally as well as settle the issue of trade imbalance between the United States and China.
From his remarks, one can see that Paulson has better understanding of the Chinese economy and also has farther sight than his predecessors.
Since its entry into the World Trade Organization (WTO) in December 2001, China has accelerated the pace of financial reform and has achieved impressive accomplishments.
This finds expression, for example, in the introduction of the share-holding system in State-owned commercial banks. Their listing on the stock market attracts overseas investors and imports the world's latest managerial expertise and the up-to-date monetary products and techniques, which not only bring down monetary risks, but also help establish a platform on which fair competition between domestic banks is staged.
Also, overseas banks are allowed to become shareholders of State-owned commercial banks, some are given the permission to handle renminbi transactions in some cities. Some overseas banks are rewarded with taking care of the off-shore foreign-exchange capital for domestic insurance companies. There are other examples.
The opening of the country's financial market falls into two categories.
First, the opening is dictated by the country's compliance with its WTO obligations. China has fulfilled many of its WTO pledges over the past five years.
Second, China has opened its financial market on its own. This is manifested in a number of developments. For example, the opening may be made ahead of the WTO schedule or has higher degree of openness than the country's WTO obligations, which is reflected, for instance, in the opening of renminbi transaction and banks' retail businesses.
In view of all this, we may say that China's monetary opening up is based largely on its own initiative while its WTO obligations are complied, instead of being forced to open its monetary market in the face of financial crisis as did Japan and the Republic of Korea previously.
While opening up to the overseas banking community, China's monetary market is also opened to domestic players simultaneously. This means the government monopoly and control on monetary resources are being liberalized; the threshold of market access lowered; discrimination against non-State ownership financial organizations dropped; the ultra-national treatment enjoyed by overseas financial organizations on the domestic monetary market scrapped, and the domestic monetary entities made increasingly market-orientated.
The monetary opening up, while being effected largely on China's own, is supposed to go ahead in a steady and smooth way.
This means that the opening up should not be allowed to create disproportionate or negative impacts while the world's latest monetary ideas, managerial expertise, risk-control techniques and new monetary products are introduced into the country via the opening up.
All this is aimed at translating the overall monetary opening up into conditions favourable for the growth and development of the domestic monetary sector.
To ensure the smooth faring of the monetary opening up, the China Banking Regulatory Commission recently released the regulation on the management of foreign-funded financial institutions. The regulation demands that all foreign-funded banks operating in China should register as legal-person banks before they can conduct renminbi transactions.
Some overseas banking players complain this imposes excessive restraint on foreign-funded banks.
This kind of institutional arrangement may push up the cost for the overseas banks' entry into the domestic monetary market and may make it more difficult for the overseas players to operate their China-related businesses.
However, the arrangement guarantees the smooth opening up of the domestic banking sector. In doing so, the Chinese banking authorities make sure the country fully complies with its WTO obligations and at the same time, create a climate favourable for the growth and development of the domestic banking institutions.
In the immediate future, as we will see, the Chinese banking authorities will make efforts to guarantee that the all-around opening of the Chinese financial market move ahead on condition of full compliance with China's WTO obligations. At the same time, restrictions to a certain extent will be imposed on overseas investors' entry into the country. All this is guided by the principles of taking initiative to open the Chinese monetary market and guaranteeing the smooth faring of the opening up. Opening up the country's monetary market and guaranteeing its smooth faring will reduce risks of the monetary system as a whole. As a result, the efficiency of the financial sector is enhanced, although risks for individual banking institutions may rise in some cases.
At present, the lack of competition, and lack of market focus and low efficiency are the primary destabilizing factors haunting the Chinese monetary sector and, in turn, pose a big threat to the Chinese economy.
In view of this, transformation of the operational mechanisms of the monetary system and introduction of competition mechanisms into the sector, which are made possible by opening up the monetary market, are at the core of the monetary reform.
Although Paulson appeals for the further revaluation of renminbi, he realizes that Chinese currency's exchange rate is only one of a host of factors that help balance the China-U.S. trade.
It is much more important, as Paulson sees it, that China's monetary sector is reformed and opened up to the rest of the world.
(Source: China Daily by Yi Xianrong)