(Yicai Global) May 16 -- At present and in the future, China faces challenges from a number of sources, including increased uncertainty in the external environment and low total factor productivity. Finance is the focus of deepening reforms in the next phase, the key spark for innovation, and the critical area for expanding opening-up.

At present, China’s total factor productivity growth rate is around 1.25 percent, just 40 percent of the rate for the United States. To reach 60 percent of US productivity by 2035, when China basically achieves modernization, the rate must reach 2.7 percent. If China’s gross domestic product growth rate reaches about 5 percent in the next 15 years, the total factor productivity growth rate has to contribute 54 percent to GDP growth, which is very difficult.

China also has many problems, including excessive dependence on oil, natural gas and iron ore imports, along with the fact that the country will enter a severely aging society period around 2035.

The focus of deepening reforms in the next phase is finance.

First of all, it is necessary to set the Chinese currency as an anchor in a timely manner. At present, the yuan is still anchored to the US dollar to some extent, which is by no means a long-term solution in terms of China’s future international status and development. A country’s currency should be anchored on the share of tax in its GDP and on the national debt. Only with an independent monetary anchor and treasury yield curve can it have a truly autonomous monetary policy.

Second, China should improve financial services to better support the real economy. An important factor in the low growth rate of total factor productivity and low contribution to GDP lies in factor mismatch, especially in terms of finance. For example, a large amount of capital was previously swept into the real estate sector in a disorderly manner as bank loans. So, what kind of financial system can align with the policy of ‘houses are for living and not speculation’?

Another example is that the profits of listed financial firms account for half of all listed companies. The central government has explicitly requested that the manufacturing sector should maintain a certain proportion, so we should think about what financial services can better support manufacturing’s high-quality development.

In addition, we should advance green finance based on China’s realities. The country’s coal-centered energy mix suggests that it is impossible to eliminate all coal power overnight. The financial sector needs to set up a financing system to serve the green transformation.

China also needs to accelerate the development of tech finance for small- and medium-sized technology enterprises. In the last round of the consumer internet era, China’s internet giants saw heavy investment by foreign capital. This time, domestic firms should seize opportunities in the cutting-edge fields of the digital, bio and green economies.

One important channel for financial services to achieve common prosperity and narrow the income gap is to give people better access income from property. For example, by building annuities into one of the pillars of the elderly care system and investing pensions in the capital market through market-oriented measures.

(The author is a distinguished professor at Fudan University, and the article is an abridged version of his speech at the Tsinghua PBCSF Chief Economists Forum 2022.)

Editor: Peter Thomas