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China’s Financial Market Innovation and the Development of Tianjin Binhai New Area HU Yang, WANG Xinran, ZHOU Shimin School of Business, Tianjin University of Commerce, China, 300134 [email protected] Abstract: In 2006, the State Council issued Document No.20, which approved Tianjin Binhai New Area as the national comprehensive reform pilot zone, making the financial reform and innovation as the top tasks. Based on literature review on financial innovation and financial development of Binhai New Area, this paper uses the method of SWOT analysis in marketing, in order to analyze the strengths, weaknesses, opportunities and threats of Binhai New Area. To overcome the weaknesses and threats, this paper provides related suggestions, with the consideration of actual situation in Tianjin. Keywords: Financial Innovation, Financial Reform, Tianjin Binhai New Area , SWOT analysis 1 Introduction On May 26, 2006, the State Council issued Related Views on Promoting the Development and Opening up of Tianjin Binhai New Area. This government document gives a variety of privileges to Tianjin and its Binhai New Area in financial market, clearly putting forward the option that “financial innovation and reform should be great encouraged in Binhai New Area. In principle, important financial reform should be carried out in this area first”. In addition, the issue of document named as To Promote the Development of Corporate Headquarters and Financial Preferential Policies in Tianjin and other supporting documents were introduced, showing the central government’s continued support for financial development in Binhai New Area, and it also provides a higher requirement on the countermeasures to today’s economic crises and challenges, in order to maintain sustainable and rapid economic development. Based on literature review and the SWOT analysis, this paper not only analyzes the advantages in the current development of financial industry, but also points out the difficulties and challenges in the Area. Compared to the previous literature, it is the first overall study on the financial development of Binhai New Area, which draws the conclusion that we should actively further the financial innovation. In addition, we put forward the relevant policy recommendations on the improvement of financial development in the New Area, in order to promote both economic construction and financial reform implementation in the New Area. 2 Literature Review The related literatures show that financial development has a positive influence on economy, especially in the process of China’s economic development. In addition, the paper reviews and summarizes the current literature on financial development in Binhai New Area. 2.1 China’s financial reform and economic development A great amount of literature suggests that financial innovation and deepening can prompt economic development. Using firm level data, Beck, Demirguc-Kunt, and Maksimovic [1] conducted empirical study on whether or not financial development relaxes the financing constraints faced by enterprises. The study found that financial development eases the financing constraints of enterprises (especially the small ones) and eliminates obstacles for enterprises to establish and expand. Nazmi [2] uses a general equilibrium model to analyze the impact of deregulation and financial deepening on the real sector. At the same time, the evidence from Latin America provides support for the main result of the model by showing the positive impact of deregulation and financial development on the investment field. There 286 is also a number of Chinese scholars start from domestic situations, researching on whether or not financial reform has an accelerative impact on economic growth. Under the background of economic reform, Ma Ying, and Chen Bo [3] investigate the process of China’s financial development and economic growth after the reform and opening up policy, and also verify the positive relationship between the economic reform, financial development and economic growth. 2.2 The literature of financial innovation in Binhai New Area The current literature about financial reform in Tianjin Binhai New Area is not very adequate. The Task Group of Bohai Industry Investment Fund [4] discussed the breakthrough and lead meaning for financial innovation, raised three aspect of ideas to promote financial breakthrough in access to the market, the construction of market and the improvement of market laws and regulations, and according to the growth and demonstration effect of Bohai Industry Investment Fund, put forward measures and suggestions. Ma Shanshan and Qi Ershi [5] analyzed the current status of logistics finance in the New Area development, concluded that it should take advantage of preferential policies to develop the logistics finance industry, and suggested measures and proposals to promote the development of logistics finance in Binhai New Area. The above literatures aimed at a particular aspect of financial innovation and its relationship with the development of the New Area, but there is no systematic illustration on the following issues, such as the overall advantages and disadvantages in the Area, the reasons why Tianjin need to develop financial industry and why the central government chooses it as the pilot zone. This paper emphasizes on the overall financial innovation in the Area, analyzes the situations and put forwards feasible suggestions. 3 SWOT analysis of Financial Industry Development in Binhai New Area From the above literature we can see the significance of financial innovation and development. To study the reason why the central government authorizes the important task of financial development to Tianjin, this paper uses SWOT analysis to the research. SWOT is introduced here to comprehensively analyze the current situation of financial industry development in Binhai New Area. 3.1 Strengths 3.1.1 The profound historical background The development of financial industry in Tianjin has a profound historical background. In the Ming and Qing dynasty, Tianjin has already been an important trade port in northern China, a financial center and one of the birthplaces of China’s modern financial industry. In 1930’s, Tianjin has become one of the two financial centers in China like Shanghai. Shortly after the foundation of P.R. China, Shanghai and other economic centers have banned stock exchange or securities market. However, Tianjin not only established a new stock exchange, but also retained more than three years. Tianjin Stock Exchange as the first one after the foundation of New China, played a significant role in national economy’s stability and recovery,. 3.1.2 Good economic location As an important area North China, Tianjin Binhai New Area located in the center of Bohai region, is not only a hub of linking all areas of China, but also a major channel for opening up to the world. It has a well-known natural harbor, which is an important foreign trade port in north China and it is the largest transshipment hub in Northeast. At present, Binhai New Area has become the most promising area and one of the regions that attract capital investment from home and abroad. The advantage of economic zone will effectively stimulate capital flows and financial center formation, and thus stimulate the development of financial industry. 3.1.3 Rich financial resources Tianjin is the seat of the Center Bank in Tianjin Great region. The four major state-owned commercial banks and Bank of Communications have branches in Tianjin. Most banks in China have also entered into Tianjin. JP Morgan Chase, HSBC, Tokyo-Mitsubishi, Societe Generale Bank and other foreign banks set up branches in Tianjin. 287 3.2 Weaknesses 3.2.1 The gap in the developed areas Compared with the domestic economic and financial well-developed regions such as Shanghai, Beijing, Shenzhen, the gap is still very large in developing financial industry. For example, both Shanghai and Shenzhen set up a stock exchange in 1990, and has been the only two stock exchanges in mainland China since then. However, since Tianjin Stock Exchange was shut down by the government in 1952, it never is reopened. The lack of stock market not only hinders Tianjin’s economy, especially in the financial industry, but also makes it difficult to rank in the list of the domestic financial centers. 3.2.2 The low level of economic development and financial industry Admittedly, there is a significant development in Tianjin’s financial industry. Although more and more foreign banks and other financial institutions open their branches in Tianjin., these international institutions set up their headquarters in Beijing, Shanghai and other places, only a number of branches in Tianjin. The domestic headquarters of internationally famous accounting-firms and industrial enterprises are not set up in Tianjin, illustrating the fact that Tianjin is still not a perfect financial center city. Additionally, the number of listed companies in Tianjin is also much lower than Beijing, Shanghai, Shenzhen and other financial developed cities, even lower than Jiangsu Province. 3.2.3 Lack of qualified personnel in finance Domestic financial professionals tend to choose Beijing, Shanghai as the top priority choice. Owing to lack of obvious advantages in both volume and level, Tianjin’s financial institutions are not able to retain talent. In addition, in the aspect of training high-level talent, Tianjin’s financial institutions and universities do not go far enough. At present, due to the financial reform and innovation, with the degree of financial deepening, Binhai New Area thirsts for talent. Tianjin must accelerate the pace with training, introduction, and reserve of financial professionals, striving to resolve the need for financial personnel, only with which can adjust to financial reform and innovation. Including these factors, imperfect market regulations, and the existing financial repression is difficult to meet the objective requirements of financial reform in Binhai New Area; shortcomings of traditional financing models, the backward of capital market also have a negative influence on Tianjin’s financial reform and development. 3.3 Opportunities 3.3.1 The support of national polities Since May 2006, the State Council issued Related Views on Promoting the Development and Opening up of Tianjin Binhai New Area, approved Binhai New Area as the national comprehensive reform pilot zone, a series of preferential policies are rolled out, which create a favorable policy environment for promoting financial reform and innovation in the Area. 3.3.2 The development of private equity funds Comparing with loans, issuance of bonds, corporate listing and other means of financing, the private equity funds has its own characteristics and advantages. Unlike loans, issuing of bonds and other traditional forms of financing, equity financing provides professional services for enterprises to improve the structure, and its “threshold” is much lower than listing financing. For this reason, private equity funds are an important part of the capital market in developed countries. In China, the development of private equity funds only at an early stage and it is not mature, and financing channels are narrow, small and medium-sized enterprises financing are difficult and other issues exist in reality, but it is also the best time to develop. As the Area being a national comprehensive reform pilot zone, the demand of financial reform and development are urgent, the development of private equity financing can meet the urgent needs of high-tech research and manufacture that small and medium-sized enterprises are assumed. 3.3.3 The opportunities from global financial crisis Due to the low openness of capital account, China’s economy has not been affected directly by the global financial crisis derived from the U.S. sub-prime mortgage. Tianjin Binhai New Area should grab the opportunities brought by the financial crisis, such as absorbability of the senior financial professionals from foreign countries and introduction to the international institutional investment. 288 In addition, Binhai New Area is actively founding the offshore financial market, developing the financing for small and medium-sized firms, meanwhile building the largest urban financial area in the world-Yujiapu financial area. This series of initiatives are harbingers of Binhai New Area facing unprecedented opportunities and development momentum. 3.4 Threats 3.4.1 The threat from competitive cities In China, Hong Kong is a main threat to Tianjin Binhai New Area. As an international financial center in Asia-Pacific region, Hong Kong has the highly developed financial operation system and increasingly becomes a world-class financial center. Hong Kong’s financial center position is difficult to be shaken in a short time, it is Tianjin’s largest competitive cities on the road of becoming China‘s financial center. In addition, Beijing, Shanghai, Shenzhen and other cities’ financial industry are also pretty impressive; they are invariably make both China and the world financial center as the ultimate goal in the development process. 3.4.2 The threat from domestic policy At present, a large part of Tianjin financial development should be owe to the government promotion; the financial reform and innovation mainly dependence on variety policies. This practice only depending on the policy is not appropriate and should be considered the case once out of government’s support, makes the development of Binhai New Area’s financial industry more sustainable and autonomy. In 2007, take the “Hong Kong stock through train” for example, the policy declared a moratorium just less than three months after it implemented and has not be opened since then. We can see that policies are also having the case of drafted hurried and difficult to implement. If blindly waiting for the policy arrival, rather than pro-active development of its own strengths and innovation is no longer to go faster and better on the way of financial innovation. 3.4.3 The threat from financial crisis The financial crisis swept the globe in 2008, the world economy has been battered; it highlighted the harm of financial regulatory system and financial derivatives. Professor Huang Ming said those book fair values down prices of financial derivatives positions in the crisis as “the bombs hidden in the capital markets”. The financial crisis formed a kind of psychological fear to a certain extent so that people are scare of financial reform and innovation. In addition, Yujiapu financial area is building a large area of office space, China’s real estate is still in the doldrums, and whether or not bringing real estate bubble is also threats in the future. 4 The countermeasures in Binhai New Area’s financial innovation To make further progress in financial innovation, Binhai New Area should overcome the weaknesses and threats mentioned in the above SWOT analysis. In this paper, a number of relevant policies are proposed, in the hope of playing an accelerative role in the development of the New Area. 4.1 The problems and solutions of dependence on governmental policies and institutions To solve this problem, we appeal that Tianjin Binhai New Area should actively develop their own strengths and independent projects, promote financial reform and innovation, instead of waiting for government support and play its own economic characteristics. In the years of development, Binhai New Area has always been using their own advantages to undertake a large number of industries and technology transfers at home and abroad, formatting a comprehensive advantage in manufacturing industries. The Area should focus on developing its own competitive industries, play their own economic characteristics and enhance the economic strength. 4.2 The problems and countermeasures on challenges from competitive cities In the development process of Tianjin, it has faced with competitive challenges from Beijing, Shanghai, Shenzhen and other cities. To solve this problem, Tianjin can play its own characteristics; develop a new style or a method of its own. Wang Wei reckons that Beijing is more official and formal; 289 Shanghai is more international, the whole goal is facing North America and the world; and the characteristics of Tianjin is localization, it is to be able to help thousands upon thousands of small and medium-sized enterprises to form a localization, a market with the industry chain. You can stream from this market, which provides a lot of resources from a grass-root point of view and dividends large capital into millions of small capital. [6] 4.3 The problems and countermeasures on financial supervision The experience of China’s reform and opening up policy has shown that only opening-up can continuously improve the vitality of China’s economy, competitiveness and ability to resist risks. China should still pursue financial liberalization and financial deregulation, in order to have a more sustainable development. Financial innovation and financial supervision should restrict and promote each other. If there is no financial supervision, financial innovation will affect the financial security. The breakout of U.S. sub-prime mortgage crisis is closely related to the unrestrained innovation in real-estate finance in the absence of effective supervision. In order to achieve a good balance between deregulation and supervision, China should draw lessons from the crisis in U.S., following the principle of prudential supervision and properly handling the relationship between innovation and regulation. 5 Conclusion Based on the viewpoint of financial reform and innovation, this paper summarizes the financial development opportunities and problems in Binhai New Area through SWOT analysis. Facing huge opportunities, The New Area should continue to enhance the degree of financial product innovation, improve financial supervision, instead of passively waiting for the national policy support. References [1]. Beck Thorsten, Demirguc-Kunt Asli, Maksimovic Vojislav. 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