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Staying Ahead of the Curve
Chinese prescriptions for global governance
 NO. 36 SEPTEMBER 8, 2016

Zhou Xiaochuan, Governor of the People's Bank of China, calls on G20 members to increase financing support to small and medium-sized enterprises at a joint press conference in Washington, D.C. on April 14 with Secretary General Ángel Gurría of the Organization for Economic Cooperation and Development (XINHUA)

Editor's Note: The 2016 G20 and China, a book compiled by the Beijing-based Chongyang Institute for Financial Studies at the Renmin University of China and published by the New World Press, is a collection of analyses on the role of the upcoming G20 Summit in China in revitalizing the world economy. The following is an edited excerpt from an article in the book titled "Writing the 'Chinese Prescriptions' for Global Governance."

Global governance achievements in the aftermath of the financial crisis in 2008 have proved that the G20 is an effective mechanism for member economies to share wisdom and reach agreements in the face of common problems. Once the G20 is transformed from a crisis response mechanism to a global governance platform, the next step would be to find ways to establish a normalized system for carrying out cooperation in global governance.

Since the outbreak of the financial crisis, the global economy has been treading on a slow course toward recovery. The complication lies in a number of areas. First of all, the momentum of the previous round of scientific, technological and industrial revolution is being depleted. Also, the quandary of imbalanced development is far from being solved, while the defects of the current economic governance mechanism are looming large. The fact that China was able to maintain a comparatively high-speed growth rate and even managed to consolidate the foundation of its real economy demonstrates that China is capable of promoting global economic development. As China plays its role of host at the G20 Hangzhou Summit, it will have the opportunity to share with the rest of the world its formula for realizing sustainable growth.

A new vision

The Chinese economy has been assimilated into the world economy and has a "complete-chain-of-industries" influence over it as well. The following four keywords can summarize the new vision that China can bring to global governance:

The first keyword is hope. China is participating in more and more global governance mechanisms, allowing people to witness its vigor and impetus for further global growth. China is actively participating in the mechanism construction of the G20, the BRICS [group of emerging national economies—Brazil, Russia, India, China and South Africa] and the Asia-Pacific Economic Cooperation forum.

Through building globally connected networks of free trade zones, China has signed 14 free trade agreements with 22 countries and regions. China participated in anti-crisis assistance programs and activities during the U.S. subprime mortgage crisis and the eurozone debt crisis. It initiated the launching of the Asian Infrastructure Investment Bank, which has attracted more than 50 countries to join and has bridged the gap of infrastructure investment in the Asia-Pacific region. All of these roles that China has played demonstrate that it can help the world to overcome its financial troubles.

The second keyword is innovation. Innovation is the country's greatest virtue, which the Chinese Government fosters by encouraging all enterprises and individuals to invest. The government has also established intellectual property protection, encouraged innovative business models in new technology promotion, and facilitated the commercialization of patented technology. China's experience with innovation will be helpful for establishing a "global innovative system" that will generate the basic drive for sustainable economic growth in the world.

The third keyword is interconnectedness. China's total trade volume now ranks first in the world, its GDP ranks second in the world, and its scale of utilized foreign investment was the largest in the world for the first time in 2014. Also, its foreign direct investment ranked third in the world in 2014, standing at $123.12 billion. It is predicted that by 2020, China will probably become the largest economy in the world, and its proportion of foreign trade and scale of two-way capital flow in the world total will continue to rise.

China is advocating the Silk Road Economic Belt and 21st-Century Maritime Silk Road Initiative (Belt and Road Initiative), which aims at sharing international products commensurate with its lifted national strength. The initiative also encompasses the promotion of an orderly and free flow of economic elements, highly efficient allocation of resources, and deep-level integration of markets. It will advance the coordination of economic policies with countries along the routes. Furthermore, it will cultivate a wider range, higher standard and deeper level of regional cooperation. This forges an open, tolerant, fair and inclusive framework for regional economic cooperation. This reflects the major trends of the world and functions as a driving force for China's economic growth.

The fourth keyword is inclusiveness. China's 13th Five-Year Plan (2016-20), which has determined the country's development course for the coming five years, has for the first time factored in global elements.

A major strategy involved in that process is the joint construction of the Belt and Road, which aims at establishing interconnectedness between the Asian, European and African continents and nearby seas, and the building and reinforcement of interconnected partnerships with countries along the routes. The Belt and Road Initiative also works toward creating a multi-directional, multi-layered and compounded network of interconnectedness, in order to realize pluralistic, independent, balanced and sustainable development in Belt and Road countries and international cooperation in production capacity.

The interconnected projects of the Belt and Road Initiative will facilitate and promote docking and coupling of the national development strategies of participating countries, cultivate regional market potential, increase investment and consumption, create demand and jobs, and enhance mutual exchanges and mutual appreciation of the cultures and civilizations of nations along the routes. These endeavors will allow people from different countries to meet, understand, trust and respect each other and to share harmonious, peaceful and prosperous lives.

Real economy boost

The G20 has focused on addressing systemic risks in the international financial markets. The Chinese Government realized long ago that, while maintaining stable macroeconomic policies, financial institutions are able to modify their service style and gear it toward stable growth, structural readjustment, greater benefits and better livelihoods for the people. They must effectively solve problems, such as financing difficulties and high costs of financing, and reinforce support for the real economy. Western practices of detaching the financial sector from the real economy, intra-corporate circulation and excessive innovation and proliferation of financial derivatives are the root cause of the financial crisis. After 2008, as part of their crisis management process, Western countries all increased financial regulation and introduced policies to limit financial innovation. In China, financial leaders became more cautious and prudent. At the end of 2011, the Chinese authorities in charge of economic work held a national conference and set up the principle that "the financial sector must serve the real economy," which caused major repercussions at home and abroad.

The relationship between the G20 and the world economy under the current regime of financialization can be divided into two mechanisms: One is to "prevent crisis from spreading," and the other is to "rebuild the economy and maintain stability." In fact, the G20 has done a great deal of work in holding the crisis in check, but has achieved little in terms of rebuilding the economy and maintaining stability. The reason for that is because the main actors on the international financial markets are mostly large Western financial institutions over which governments have little regulatory control. What government can do is go ahead and set up another system or a sort of "firewall." On the rebuilding part, the Western governments' organizational model becomes hopelessly inadequate. The Chinese Government has consistently stressed the closely linked and mutually nourishing relations between the financial sector and the real economy. It has done a lot of work in this regard.

—The Chinese Government has formulated financial policies from the perspective of long-term strategic development so that more financial resources will be invested in industries that will benefit sustainable and stable economic development.

—It has formulated concrete financial measures that support emerging industries of strategic importance to the economy. For example, having commercial banks intensify credit support to emerging industries, promoting innovation in the credit and risk management system, speeding up the creation of financial products that cater to the demands of emerging industries, and encouraging financial institutions, such as securities companies, industrial funds and private equity funds, to provide direct financing to innovative enterprises.

—The Chinese Government has worked to build multi-layered capital markets, lower corporate financing thresholds, and develop stock, securities and fund markets. Efforts have also been made to substantially raise the proportion of direct financing, to satisfy the diversified needs for investment financing through pluralized financial markets, financial products and intermediary services, and to facilitate low-cost corporate financing.

—The Chinese Government has steadily implemented the reform of banks carrying out policy lending and has clearly spelled out policy-defined functions and positions. It has also fully utilized the advantages of such financing channels to increase public services. To adapt to the trend of economic globalization, the government has promoted open financial development, built and strengthened the restricting mechanism of capital adequacy in order to provide low-cost, long-term and stable-source funding support for structural adjustments for purposes of growth and going-global operations.

—The Chinese Government has expanded the coverage of financial services by focusing on developing small financial institutions, building and improving multi-layered systems of inclusive financial institutions, and expanding primary-level financial services. In efforts to gradually realize full coverage of financial services, it has kept improving the environment for payment services in rural areas, facilitated innovations of financial products dedicated to rural clients, increased the availability of loans to farmers and agricultural businesses, and strengthened the protection of the rights of consumers and financial services for vulnerable groups.

The measures have been highly effective in maintaining stable growth, adjusting economic structures, and improving people's livelihoods. They have also played an active role in supporting the development of emerging industries, upgrading and renovating traditional industries, and reinforcing financial services in infrastructure construction. Introducing the concept of "having the financial sector serve the real economy" into global financial governance will help cultivate a new momentum for global economic growth.

For more G20 articles, please scan

Copyedited by Bryan Michael Galvan

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