Competitive edge key to China’s growth

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Employees working at a welding workshop in a car factory in Weifang in China’s eastern Shandong province. AFP

China is in a critical transition period where it needs to improve the efficiency of resource allocation in its capital market to promote its economic transformation and upgrading, and achieve high-quality development.

Increasingly fierce competition among countries also requires China to set up a more independent and strong capital market to help the country fulfill these missions. However, a strong capital market is possible only when there is high-quality economic development.

What China needs is an effective capital market in which greater information disclosure, more transparent trading and more sound rule of law can better protect investors so that funds can be channeled to efficient sectors to promote high-quality economic development. Whether or not a strong capital market can be established depends on the quality and scale of a country’s economic development, the quality and number of its listed companies, and whether it can become the centre of global capital allocation.

In recent years, after the introduction of the registration and delisting systems, China’s securities market has begun promoting structural reform and high-quality development.

The US has a strong capital market, but it is the product of long-term US development, especially the US dollar system and the prowess of US companies. In fact, the US capital market is also an expanding bubble.

Since the end of the Cold War, globalisation has helped the US realise the global expansion of its enterprises, especially its financial industry. In the process, its monetary policy has been in a state of expansion. Behind the strong US capital market is the support of its ever-increasing dollar liquidity. However, this has also led to the hollowing-out of the US economy and the widening rich-poor divide. The root cause of the US’ current predicament is that its economy has been hijacked by a powerful capital market.

To achieve high-quality development, China needs a strong capital market and competitive advantages in resource allocation in the global market, and such advantages hinge on more Chinese companies succeeding in the global market. Given that China’s current economic structure and enterprise quality cannot support a strong capital market, China needs to improve the global competitiveness of its enterprises.

It needs to establish an effective capital market that can optimise the allocation of resources and promote high-quality economic development. It also needs to improve the market environment, expand opening-up, encourage fair competition and improve the quality of enterprises. China’s capital market can then become more mature and stronger. There is no need for China to pursue a hefty capital market right now, because behind the heftiness are bubbles, a hijacked monetary policy and a distorted economic structure.