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Expanding direct financing will promote economic restructuring

By Guo Shuqing (People's Daily Online)

15:12, July 03, 2012

Edited and translated by People's Daily Online

Global competition in emerging industries is always focused on the resource allocation efficiency of different countries. The success of Apple and Facebook should be partly attributed to the U.S. capital market’s ability to respond quickly to opportunities.

China’s super-fast economic growth over the past 30 years has contributed to a fundamental change in the global economic landscape. However, this achievement is not without cost. The country has reached its limits in many areas from the perspective of factor inputs and resource allocation efficiency.

Reform of the financial system is crucial to transforming the country’s economic growth model.

Heavy dependence on indirect investment through banks indicates a serious structural imbalance in China’s financial markets.

The balance of loans by Chinese banks accounted for 54 percent of the country’s total social financing amount at the end of 2011. The market value of the shares of companies listed in China and the balance of Chinese bonds accounted for only less than 30 percent of the total amount, far lower than 73 percent in the United States, 62 percent in the United Kingdom, or that in Germany or Japan.

Small and medium-sized enterprises have only limited access to services provided by a bank-dominated financial system.

Direct financing has the natural advantage of promoting economic restructuring. Small and micro-sized enterprises most often need principals or long-term debt financing, which can almost only be done through direct financing.

Capital markets can play a major role in discovering and promoting strategic industries, and real emerging industries are often conceived in small and medium-sized enterprises. It is hard for these enterprises to obtain bank loans due to their uncertainty and light assets. In this situation, the sale of stocks or bonds, venture capital, and private equity funds can provide companies and investors with a profit-and-loss sharing mechanism.

Global competition in emerging industries is always focused on the resource allocation efficiency of different countries. The United States beat other countries in the high-tech sector in the 1980s thanks to its mature capital markets. Both Apple and Facebook have gained a large market share because U.S. capital markets discovered the potential of high-tech industries after the crisis, and then helped competitive high-tech companies develop rapidly.

A mature capital market can also reduce financial risks.

The United States was at the center of the financial storm in 2008, and Europe was later severely affected. Three years later, the U.S. economy was recovering at a faster pace than Europe thanks to a more balanced financial system.

The United States and Canada rely more on direct financing, while Europe relies more on indirect financing.

In fact, even when the crisis was at its worst point, major U.S. companies were still abundant in cash, and innovative U.S. enterprises could still raise capital from equity markets and high-yield bond markets as usual.

After a 2007 research on the economic crises over the past 50 years, two economists at the International Monetary Fund found that both the speed and quality of recovery in the United States and Canada were higher than in Belgium, Italy, Spain, and other bank-dominated economies. This may explain why the United States enjoys global economic hegemony.

The author is the Chairman of the China Securities Regulatory Commission.

Read the Chinese version at: 扩大直接融资有利于经济转型, Source: People's Daily


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