The final goal for China's economic reform is to establish a sound and complete market economy system. With the continuing advancement of the market-oriented reform of the economic system, the market-determined of capital transaction in China will continue to develop to a higher level. Especially after China's WTO entry in 2001, the speeding up of market-oriented reforms in China's economic system will bring about a faster development of market-determined capital transactions.

1. More Improved Capital Market System

At present, the proportion between the funds raised through the capital market and the bank loans is about 2 to 8, which indicates that on the one hand, the ratio of direct financing is relatively low and has great potentiality; on the other hand, the bank shall take too much risks. With the development of scientific technology and high-tech enterprises, the proportion of high-risk industries shall keep growing, which requires to replace the traditional fund-raising means characterized mainly by indirect financing with one means characterized by capital market financing. A mechanism in which the investors and fund-raisers both take the risks shall be established, and the development of the new economy and science and technology also calls for an increased proportion of direct financing. For the purpose of adapting this demand, the second board in China shall be established when the conditions are ripe for law-making, regulation, technology and market preparation. The second board provides a direct financing channel for those medium and small size enterprises with a high technology contend and a good growth prospective, and a withdrawing channel for the venture capitals. Meanwhile, it plays an important role in promoting the economy development, optimizing the industrial structure and increasing the whole competitiveness of the national economy by way of supporting the growth of high-tech enterprises. The bond market shall expect a significant development. The proportion of raising funds through bonds by enterprises shall keep increasing too, and a diversified securities market system in which the stock market and the bond market are co-existing shall be formed to expand the room for the further development of the securities market and also to reduce the too much risks borne by the banks. At the same time, the laws and regulations governing the capital market shall be further strengthened, and a comparatively perfected legal system concerning securities regulations focusing on the Securities Law of the People's Republic of China shall be formed, and provide a solid legal foundation for the standardized development and administration by law of the securities market. The securities market, with the supervision and administration being further strengthened, shall meet with its standardized development.

2. Further Market-Oriented Flow and Allocation of the State-owned Capital

According to the demands of the goal put forward in the Report of 16th National Congress of the CPC, there shall be a breakthrough progress in the reform of state property management mechanism. The establishment of State Assets Supervision and Administration Commission shall greatly promote the reforming process of state-owned enterprises, break the pattern in which state property was separated into five parts and governed respectively under the five national departments. State property shall not be solidified in a certain industry or region, and shall be given freedom to flow among different industries, relatively increasing the allocation and utilization efficiency. With the advancement of market-oriented reform of state-owned enterprises and the strategic reorganization of the state-owned sector, the corporate shares and state-owned shares of the state-owned listed companies shall enter the market for circulation, which shall not only further strengthen the state's ability in resolving problems leftover for historical reasons and expand the scope covered by the social security mechanism, but also promote the structural regulation of the state-owned sector and urge the state-owned sector to concentrate on the basic industry and public welfare industry, upgrading the leading role of the state-owned sector in developing the national economy, meanwhile further improving the diversified stock ownership of state-owned enterprises and establishing an improved administration structure by legal person, with an aim to make state-owned enterprises more adaptable to the demands of the market economy and realizing the valid flow and maintenance and appreciation of state property. The work has been pushing forward to break the monopoly in post and telecommunications, traffic and communication, power, petrochemical, transportation sectors and to invite the market competitive mechanism, and the private capital shall play a more important role in those fields.

3.The Proportion of Funds from the Market Increasing

Since 1998, China has actively expanded its domestic demand by way of adopting the positive fiscal and monetary policies in order to overcome the effects brought about by the Asian Financial Crisis, making the proportion of the governmental investment in the total investment in fixed assets relatively increase. At present, with the resumed economic growth in China, the expanded fiscal policy adopted to fight against the Asian Financial Crisis and the world wide economic depression may be possible to gradually fade out after being carried out for almost 5 years. In 2003, the planned issuing scale of the construction bonds in China is 140, 000 million yuan, a drop by 10,000 million yuan as compared to 2002. This is an important signal indicating the shifting of the fiscal policy from an expanded one to a medium one. With the gradual fading out of the expanded fiscal policy, the ratio of the budgetary investment funds in the total investment in fixed assets shall decline. With the reduced number of state-owned enterprises, the ratio of the state-owned sector in the total investment in fixed assets shall decline too. While, the ratio of those market-oriented investment funds coming from the loans of commercial banks, securities financing and utilization of foreign investment shall resume its increase. So, in general, marketization of capital in China will develop to a considerably higher level.

4. Foreign Investment to Further Increase in Volume

Foreign investment plays an important role in marketization of capital in China. Because the means of employing foreign investment is relatively limited and characterized mainly by direct investment, the state strictly controls the foreign investment in consideration of the state's ability to pay debts and the maintenance of the macro economy. While the stock financing is affected by the inconvertibility of renminbi under capital accounts and divided into A Share and B Share, this prevents foreign investment from better participating in the regulation of China's economic structure and the reorganization of the state-owned sector. After joining the WTO, China's economy shall day by day incorporate in the world economy. The reform in economic system shall be further deepened, the convertibility of reminbi under capital accounts shall make significant progress, and the channel and room in which foreign investment participate in China's economic development shall be further expanded. According to the promises made in the field of securities by China when entering WTO, the foreign securities institutions may directly participate in B Share transaction. So, China's capital market and international capital market shall gradually become incorporated, and the flow of international capital shall bring about more important effects on China's economic development, and require the macro economy regulation in China to he carried out at a higher standard.

5.Financing Mechanism Combining Direct and Indirect Approaches with Effective Regulation by Market to be Formed

In honoring our commitments to the WTO, the functions of the Chinese Government shall be further shifted from the governmental administrative system to the public administrative system, and the investment management system shall gradually turn into a market-oriented investment management system indirectly guided by the government through the macro regulation policy. Meanwhile, the reform in financial system shall be the focus in current economy system reform. At present, the transformation of the state-owned commercial banks and insurance companies toward the stock-holding mechanism have been initiated, and shall further increase the ratio of non-state-owned sector financing and create good conditions for the development of non-state-owned sector. The competition among the banks shall be intensified, and the risk restraint mechanism of commercial banks be further strengthened. The marketizatation of the financial supervision and administration mechanism is actively propelled, and the reform in marketization of interest rate is steadily under-way. The financing costs and capital utilization prices in China will more effectively reflect the supply and demand situations in the market. China's financial market, the capital market in particular, are becoming more standardized. The in-depth development of marketization in the investment and financing mechanism shall substantially contribute to the marketization of investing funds such as bank loans.

(China.org.cn November 7, 2003)