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Qiao Xinsheng

 

The world has evolved from a traditional mercantile economy to one that puts emphasis on financial service industry and China needs to cater to this trend and make a major shift in its economic development policy.

 

In light of the basic economic development theories, the world has gone through stages of physiocracy, mercantilism and the current one focused on financial service industry.

 

The physiocratic economy emphasizes the importance of agricultural growth, which is in line with the demand of a natural economy. The mercantilism, on the other hand, puts stress on the value of money and resorts to international trade to accumulate money.

 

In its early years of foreign trade over the past half century, China has adopted a physiocratic approach, which is aimed at exchanging goods for foreign exchange to purchase the advanced technology and equipment from the developed economies.

 

Such a development philosophy, however, determines that China must increase its exports to accumulate foreign exchange. This has given rise to a series of problems, such as anti-dumping measures from other countries.

 

Although China has been gradually adjusting its foreign trade policy, its mercantilism-directed foreign trade policy has not fundamentally changed.

 

In the meantime, Western countries have long shifted priority to the financial service industry. Making use of the changes in the exchange rates in the international market, they have made tremendous profits through foreign exchange settlement and trading.

 

The history of world trade shows that the financial service industry had served merely as a supportive tool for exchange of goods in the early days of global trade. Now few would deny that it has developed into the most lucrative sector in the world. Those countries that put priority on financial service industry have not only accumulated huge amount of capital and profits, but diverted commercial risks also.

 

China lacks qualified financial professionals and therefore, has remained largely defensive in the face of the impact from international capital flows. In the short run, it is necessary for China to adopt such a cautious approach.

 

However, given the increasing role of the financial service sector in world economic development, China will face more pressure if it does not change its traditional trade policy.

 

Currently, China has the largest pool of foreign exchange in the world, but if it cannot transform it into usable capital, once the international exchange rate market fluctuates, the wealth will risk being depreciated.

 

Therefore, it is the paramount task for policy makers to shift the focus of the financial policy.

 

A financial industry-focused strategy will be based on three preconditions. One is a comprehensive network of financial institutions. This serves as the basis of global flow of a country's foreign exchange capital.

 

China's financial institutions, however, are generally uncompetitive in the international market. Most of the overseas branches of Chinese banks do not have much influence in the local market. Some have even faced the danger of being marginalized.

 

Without a global network of competitive financial institutions, China will not be able to shift its focus to a finance-emphasized development strategy.

 

A modern financial regulation system is indispensable for a finance-focused development mode. It is a strong safeguard for financial security.

 

If a unified and workable financial regulation system was not put in place, the loopholes in the financial institutions would not only fail to help them appreciate the value of their capital, but may spiral out of control and threaten the overall economic security of the country.

 

Some branches of domestic financial institutions have lost millions of yuan in financial scandals as a result of loose internal management, which points to the country's unsatisfactory financial regulation.

 

Reform in the financial regulation must be accelerated; otherwise, a finance-focused policy would only open the door for foreign capital speculators to seize domestic financial market.

 

China also needs to foster talented financial professionals, whom it urgently needs.

 

Such professionals are the core part of the finance-focused strategy. In the international financial market, the rapidly changing situation requires the financial operators to be highly capable of making use of market fluctuations to make profits.

 

From the macro-economic perspective, a finance-focused strategy needs large financial reserves, predictable financial rules and peaceful international environment.

 

China has strong economic power and a fairly large pool of capital reserves. What it needs is to establish stable financial rules and set its development in a peaceful international environment.

 

From China's economic statistics, we can see that the growth of the Chinese economy is still pushed by traditional industries, such as energy, basic information industry and tobacco. If we cannot change our growth mode and make financial service our new pillar industry, our economic shift would suffer setbacks.

 

The author is a researcher with the Zhongnan University of Economics and Law, based in Wuhan, Hubei Province.

 

(China Daily November 20, 2006)