How can the Chinese financial system contribute to sustainable economic development?

Financial Shanghai
Shanghai © Jan Heidrich

SOAS University of London is the lead research organisation on a new ESRC-funded project entitled Research on China’s Financial System towards Sustainable Growth: The Role of Innovation, Diversity and Financial Regulation.

Principal investigator, Gerhard Kling, Professor of International Business and Management at SOAS, outlines the aims of the project:

What is the focus of your research?

“Our project focuses on financial inclusion of households and companies in China.  Financial inclusion aims to provide access to financial services such as loans and savings accounts at reasonable prices.”

“The problem of increasing financial inclusion is that too much of it can contribute to financial instability.”

“However, about 120 million people in China do not have proper access to financial services limiting their possibilities to save, invest in their future and participate in China’s economic success.”

Is that a problem?

“Currently, only large corporations and state-owned enterprises have access to finance, while small and medium-sized (SMEs) companies struggle to get bank loans for short and long-term investments.  This has implications for economic growth, inequality and financial stability.  The latter is a major concern as some companies have access to too much capital, distorting markets and affecting competition.”

Does this lead to unregulated activity?

“As of April 2016, shadow banking accounts for 15.19% of total credit.  The expansion of shadow banking seems to be a response to disparities in access to finance within large parts of the economy, notably small and medium sized enterprises (SMEs), facing financial constraints.”

How is new technology affecting the situation?

“Financial innovations (fintech) are changing the competitive landscape in banking with new market entrants and innovative services such as mobile banking and peer-to-peer lending.”

“Our project will explore the role of fintech companies and their possible contribution to improving access to financial services.”

“In spite of the considerable potential of newly emerging fintech businesses in China, recent issues, such as the collapse of the peer-to-peer lender Ezubao, highlight the need for better regulation of the industry.”

And what about green finance?

“Our project also includes an analysis of green finance in China.  Environmental risk is seen as a material risk to the financial sector, and the financial sector is also the place where the allocation of capital into sustainable or non-sustainable investments is decided.  Ma Jun, the People’s Bank of China’s (PBoC’s) Chief Economist, has set up large working groups within the central bank, and the Green Finance Committee was set up by the PBoC to develop green finance practices, including environmental disclosure, environmental stress testing for the banking sector, and guidelines on greening China’s overseas investment.  We will assess whether these recent policy changes have triggered a change in lending practices.”

Want to learn more?

The School of Finance and Management at SOAS is a leading centre for research, which aims to enhance the theoretical and empirical understanding of finance and management in a global context.

The School offers a wide range of degrees at both undergraduate and postgraduate level, including BSc Accounting and Finance and BSc International Management (China); and MRes in Finance and Management, MSc International Management (China), and MSc Finance and Financial Law.

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