By Simon Miller

China has to reform its financial sector if it is to achieve its goal of a new structure for economic growth according to the World Bank.

In its latest report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, the World Bank said that along with enterprise, land and labour reforms, financial sector reforms were vital to complete its move to a market economy.

The report said that reforms should include commercialising the banking system, gradually removing interest rate controls, deepening the capital market and further developing independent and strong regulatory bodies to support the eventual integration of China’s financial sector within the global financial system.

It added that financial reforms in the next two decades should be decisive, comprehensive and well-coordinated, following a properly sequenced roadmap. A priority was to liberalise interest rates according to market principles according to the Bank.

“Central to the report’s findings is the need for China to modernize its domestic financial base and move to a public financial system-- at all levels of government -- that’s transparent and accountable, overseen by fewer but stronger institutions, to help fund a changing economic, environmental, and social agenda,” World Bank Group president Robert Zoellick said.

To fund China’s priorities in the decades ahead, and to deal with external shocks, the report calls for further fiscal system reforms.

These should “include improving the efficiency of raising revenue and changing fiscal relations between different levels of government as well as strengthening the efficiency of public spending”.

The report proposes a sequencing of reforms, as well as quick wins and actions to address short term risks. Support for reforms will be stronger if the plans are based on full participation throughout all levels of society. The biggest risk is that vested interests will try to thwart reforms.

The World Bank pointed out that as a key stakeholder on the global economy, China could consider how its structural reforms relate to rebalancing changes globally.

“China should support free trade and back a multilateral agreement on investment. China’s long-term interests lie in global free trade and a stable and efficient international financial and monetary system, relying on multilateral frameworks to help shape the global governance agenda,” said the report.

It added that China’s growing weight in world trade, the size of its economy and its role as the world’s largest creditor will make the internationalization of China’s renminbi inevitable.

The report continued: “Acceptance of the RMB as a major global reserve currency will depend on the pace and success of financial sector reforms and opening of its external capital accounts.”

The report was carried out by a team from the World Bank and the Development Research Center of China’s State Council, and can be found here.

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