Concept of a Financial Sector: Development Into a Financial Center

Chinese Finance Sector
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Concept of a Financial Sector: Development into a Financial Center
China’s financial sector is comparatively small compared to western economies such as the United States. The history of the Chinese financial sector dates back to the 1980s when the country began its gradual economic growth with the slow introduction of a market economy. Before the 1980s, China had a single government-controlled banking institution: - the People’s Bank of China (PBOC) (Chen & Vinson, 2016). Since that time, significant economic reforms have made banking to be driven by market fundamentals. Recently, the financial sector has witnessed significant developments with establishment of two financial centers: Shenzhen and Shanghai. These financial centers were created in 1990 and have become large trading centers that compete with developed economies (Statistica, n.d.). Although their market capitalization fell below the Hong Kong stock exchange, they had a significantly higher turnover.
In addition to the Shenzhen and Shanghai stock exchanges, the National Equities Exchange and Quotations (NEEQ) is an equity exchange in Beijing with an insignificant trading volume. In 2021, the Beijing stock exchange was founded as a NEEQ subsidiary (Statistica, n.d.). The pressure to establish the Chinese financial sector came from Chinese policymakers who aimed to develop an independent financial market (Chen & Vinson, 2016). However, the strict regulation of the Chinese market and its comparative isolation from global investors have made foreign stock exchange listing an attractive option for many Chinese firms (Chen & Vinson, 2016). For instance, tech startups prefer international stock exchanges as a countermeasure.
This preference motivated the Chinese government to establish boards like Chinext and Star-A market with less restricted entry standards (Statistica, n.d.). The establishment of star Market was the latest step towards building China as a world financial center. After the board’s launch in 2019, it became the ideal exchange for a series of enormous Initial Public offerings (IPOs) (Statistica, n.d.). The developments experienced by the Chinese financial industry, including the establishment of stock exchange markets, have contributed to the country’s position as the second-largest economy in the world.
Financial Services in China
Financial services in China have increased spontaneously in recent years, extending the nation's Gross Domestic Product (GDP). Due to this rapid expansion, financial services account for over 30% of the growth of the Chinese service sector (Elliott & Yan, 2013). One of the financial services available in China is banking. Banks dominate the Chinese financial system, offering the private sector about 60% of total credit. The Chinese banking system is equitably concentrated, with five banks splitting nearly 50% of the total loan market (Elliott & Yan, 2013). Banks have made it easy for state enterprises, borrowers, businesses, and local governments to acquire loans.
Another financial service is insurance. China has several insurance companies, including China Pacific Insurance Company, Ping An Insurance, China Life Insurance Company, Tianan Insurance, and China Re, among others (Elliott & Yan, 2013). These companies provide financial support and minimize uncertainties in business and human life. They also provide an investment channel. For instance, life insurance enables systematic savings due to regular premium payments. The insured get the lump sum amount when the contract matures. Therefore, life insurance encourages saving.
Another financial service is an investment. In China, trust companies are financial firms that manage assets and make investments on behalf of clients. They advise businesses, investors, and governments on investment matters and help them make investment decisions (Elliott & Yan, 2013). These companies are the most significant type of non-bank financial institutions in China. They are also the primary non-bank financial entity authorized to issue loans directly.
The Role of the Stock Exchange
Shanghai and Shenzhen are the two stock exchanges in China established in the early 1990s. They rank second worldwide based on market capitalization (Wenkui, 2015). These stock exchanges were created as part of the country’s economic reform process. Their original purpose was to help reform and privatize China’s vast state-owned enterprises (SOEs) (Wenkui, 2015). Economists anticipated that the stock exchanges would form a critical component in China’s financial system, enhancing a more efficient allocation of financial resources (Wenkui, 2015). However, this has not been the case. China’s stock exchange market is marred with corporate governance problems, making it highly inefficient.
Generally, the stock exchange plays a significant role in facilitating liquidity. Stock exchange provides a ready platform for selling and purchasing securities (Schwartz et al., 2015). This builds confidence in investors by assuring them that existing investments can be converted into cash, enabling them to trust the stock exchange trade. Stock exchanges also determine the security prices since they operate on securities' demand and supply (Schwartz et al., 2015). Speculation increases this demand and supply in the market, making growth-oriented and profitable securities increase value (Schwartz et al., 2015). This securities valuation helps investors, creditors, and governments analyze and identify the security that will give them the most return on investment.
Another role is to facilitate investment. The stock market is an essential investment source in various securities that provide high returns. Investing in the stock market offers a compelling investment option for businesses. In the same context, the stock exchange attracts foreign investments. This accelerates capital inflow within the national market, increasing the opportunity to create wealth (Schwartz et al., 2015). The stock exchange also measures a country's economic state. Through it, traders can determine the industries and firms that are developing or booming and those that are falling or making losses. One can understand the entire economic picture through a stock exchange.
The Role of the Central Bank in Developing the Financial Sector
The Central Bank plays a vital role in a market-driven financial system. Its primary role is to conduct monetary policy to achieve long-term stability of the purchasing power of money (Goodhart, 2011). Providing price stability enables the central bank to improve the financial markets' efficiency and stability. Since the central bank is responsible for price stability, it must regulate inflation by controlling money supplies through monetary policy. Studies show that the central bank maintains price stability by performing open market transactions that either absorb extra capital directly or inject the market with liquidly (Goodhart, 2011). For example, a central bank may lower the amount of money by selling government bonds under a sale and repurchase agreement (Goodhart, 2011). Such open market operations steer short-term interests, influencing economic growth.
In China, the central bank was responsible for making reforms that led to the introduction of various market elements in the functioning of the country’s economy. Balino (2011) noted that the Chinese central bank is criticized for using non-traditional monetary policy. Some have been highly invasive. According to Balino (2011), China altered its normal free-market operations in the past by manipulating currency values. Ultimately, the central bank is responsible for growing the country's economy and maintaining currency stability.
Simply put, financial sectors develop through monetary policy. The central bank oversees the country's monetary system, including monetary policy and implementing specific goals like currency stability (Balino, 2011). To ensure the stability of a nation’s currency, the central bank must be the regulator and authority in the financial and banking systems.
The Roles and Op...