Section 4 Achievements and experience of China's financial system reform

After the founding of New China，especially since the reform and opening-up，China's financial industry has been playing an important role in creating an independent currency system，maintaining a well-organized financial market，supporting economic development，and adjusting the economic structure，and has become indispensable in the process of macroeconomic management and regulation.

I.Achievements of China's financial system reform

To sum up，the major achievements of China's financial system reform are as follows：（1）A unified and complete monetary system has been established. After a relatively complete currency system was established through a series of reforms，RMB has become a relatively stable currency in the world. After the launch of reform and opening-up，by continuously promoting the foreign exchange system reform，an exchange rate management system that is basically in line with China's national conditions has been formed，laying a foundation for RMB's currency value in the domestic and international market. In international economic exchanges，RMB has also gained a good reputation for its stable exchange rate.（2）A financial organization system with complete functions has been formed. The financial organization system has evolved from a single national bank system to a system in which the “one bank and three commissions” are in charge of regulation and supervision，state-owned commercial banks play a leading role，policy finance is separated from commercial finance，various financial institutions cooperate with each other，and multiple financing channels coexist and complement and coordinate with each other. The new system has created a favorable monetary and financial environment for the sustained，healthy and stable development of the national economy.（3）A well-organized financial market with orderly competition has been built. China has established a relatively complete money market that includes the interbank lending market，interbank bond market，large-denomination certificates of deposit market，and commercial paper market. The smooth flow of money in the money market has strengthened the ability of banks to lend and improved the efficiency and intensity of monetary policy transmission. The money market interest rate can sensitively reflect the changes in the positions of financial institutions and the central bank's monetary policies，and has gradually become a major target of monetary policies and a main economic indicator，laying a solid foundation for the marketization of interest rates. As for the capital market，the rapid development of the bond market，stock market and fund market in recent years has provided a sound basis for establishing a multilayered capital market system，improving the structure of the capital market，and diversifying capital market products.（4）A flexible and efficient financial regulation mechanism has been formed. After the financial reform began in 1979，the focus of macroeconomic management gradually shifted from physical management to value management，with guiding plans and market-oriented regulation gradually replacing mandatory plans. Banks began to replace government finance to play a dominant role in the concentration and distribution of social funds，and the scope of bank loans gradually expanded. To cool down its overheated economy at the macro level since the second half of 1992，China achieved a “soft landing” of its national economy. After the Asian financial crisis broke out in 1997，the choice，application，timing and intensity of monetary policy tools and the transmission mechanism of monetary policies all changed significantly. Through adjustment and coordinated implementation of policies，financial macro-control has produced favorable results in promoting economic development.（5）A standardized financial regulation system has been set up.Since the launch of reform and opening-up，China has established and improved a legal framework for financial regulation by promulgating a series of financial laws and regulations for banking and non-banking，securities，and insurance regulation. To adapt to the diversification of financial institutions and the overlap and competition between financial services，a financial system that features separated operation and separated regulation has been established. By reforming the regulation system of the central bank，establishing and improving the regulation system of the securities industry，insurance industry and banking industry，and gradually enriching regulation measures in the process of reforming the financial regulation method，the financial regulation system has been further developed and improved，playing an important role in maintaining a well-organized financial market，implementing national economic and financial policies，and promoting national economic development.（6）China has opened its financial market to the world. To meet the overall strategic need of the economic system reform，China has taken a step-by-step approach in the process of financial opening-up to ensure the stable operation and development of the financial system. As China is bringing in foreign financial institutions，Chinese-funded financial institutions have also begun to enter the international financial market by implementing the “go global” strategy. After joining the WTO，China's financial industry has been further integrated into the world economy，and has been continuously developing to meet the requirements of internal reforms and respond to external competition，further improving its financial service level and competitiveness.

II.Problems in China's financial system construction

Despite such great achievements，the problems in the construction of the financial system cannot be ignored. So far，some prominent issues include[22]：（1）Coordination and collaboration in financial regulation. At present，it is increasingly difficult for China's separated regulation model to adapt to the rapidly developing and changing financial market and landscape. On one hand，the adoption of the Financial Services Modernization Act （1999）in the US means that mixed operations have become a new development trend. On the other hand，cross-sector innovative financial products often lead to regulatory conflicts between different regulatory agencies，which does not help to establish a unified financial market or to promote competition between institutions providing similar products，and may bring ethical risks to market participants thus affect financial stability. In order to solve these problems and improve financial regulation under the separated regulation system，it is necessary to establish a sound mechanism for coordination between banking，securities，and insurance regulation agencies，and for their coordination with the central bank and financial departments.（2）Huge foreign exchange reserves. Since the beginning of 1999，China's foreign exchange reserves have been climbing month after month. Especially in the past two years，China's foreign exchange reserves have been setting new records almost every day. So far，China's foreign exchange reserves have become the largest in the world. However，the high growth of foreign exchange reserves is not a benign growth based on the internal and external balance of the economy，and has caused obvious negative effects. In addition to causing disputes and intensifying trade frictions，the continuous rise of funds outstanding for foreign exchange has increased the hedging cost of the central bank，weakened the independence of the monetary policies adopted by the central bank and the effectiveness of regulation through monetary policies，and put more pressure on operating huge foreign exchange reserves.（3）Lack of rural financial services. China's financial development has obvious geographical and regional characteristics[23]. China's financial reform in the past 20 years has shown a tendency of “emphasizing cities and neglecting rural areas”. Financial resources have been concentrated in cities，large and medium-sized enterprises，and emerging industries. Agriculture and the rural economy at the county or lower level are suffering from an extremely serious lack of credit，which has caused the current situation that demand for funds in rural areas is greater than supply. Studies have shown that a significant financial gap has actually appeared in rural areas，and that the gap has a special formation mechanism that cannot be explained with Patrick's “demand-following” or “supply-leading” theories[24]. The underdeveloped rural financial market，non-marketization of the capital price，and lack of channels for smooth transition between deposits and investment have led to inefficient financial operations in rural areas. As a result，the needs of rural economic development cannot be satisfied，the adjustment of rural economic structure has been hindered to a large extent，and it has become difficult for the financial industry to provide sufficient funding and service support for the construction of a new socialist countryside.