Download China’s Financial Market Innovation and the Development of Tianjin

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
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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.
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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.
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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;
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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
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