We live in an era of hyper uncertainty marked by trade wars, climate change, and disruptive innovations. But China continues to make significant contributions to global integration and shared prosperity by opening up its financial services sector.

Since the 1990s, China's financial sector has been opening up to the world. This process accelerated after China became a member of the World Trade Organization in 2001. Foreign financial institutions have been entering the Chinese market for nearly 20 years now. While there remained restrictions on them due to potential systemic risks, an internationalized and marketized financial sector has always been a critical part of China's blueprint for building a modern financial system.

In fact, China reacted to a dramatically-changing international environment by making the financial services sector more open and accessible for foreign investors, besides sharing the benefits of China's development. China's efforts to open up its financial services sector has strengthened considerably in recent years. In April 2018, President Xi Jinping announced further opening-up of China's financial services sector and called for faster implementation of the opening-up measures.

Right after that, People's Bank of China Governor Yi Gang laid out 12 timetable-bound liberalization measures for the financial sector and the China Banking and Insurance Regulatory Commission published on its official website the "Initiative of CBIRC to Expedite the Market Opening-up for the Banking and Insurance Industries".

The related reforms have raised the foreign ownership cap in life insurance companies from 50 percent to 51 percent, removed foreign ownership caps in banks and offered foreign owned insurance brokerages the same business scope as that to their domestic competitors.

The year 2019 saw impressive progress in China's endeavor to achieve the initiated improvements. In May, CBIRC announced 12 new measures on the financial sector's opening-up. In July, Premier Li Keqiang pledged to abolish ownership limits for foreign investors in the financial services sector by 2020, a year before the original schedule.

On July 20, 2019, the Financial Stability and Development Committee office published the Relevant Measures for Further Opening Up the Financial Sector (also known as the 11 Measures), which caught the attention of global financial giants. On Oct 15, 2019, the State Council formally announced revised regulations on foreign-invested banks and insurers, representing the government's efforts to implement the measures.

After 40 years of fast-paced economic growth, China's financial services sector is one of the largest in the world and the capital allocation demand for China's markets is increasing. In 2004, China accounted for 1.2 percent of the world bond market, compared with 42.2 percent for the US and 26.5 percent for European Union. By the end of 2018, China's bond market had expanded to 12.6 percent of the world's total, while America's had shrunk to 40.2 percent and the EU's to 20.9 percent.

Similarly, the Chinese mainland's share of the global equity-market capitalization rose from 1.2 percent in 2004 to 8.5 percent in 2018. Over the same period, the US' share of global equity-market capitalization fell from 45.4 percent to 40.8 percent and the EU's dropped from 16.3 percent to 10.8 percent. According to the Institute of International Finance, since 2018, international investors have put $75 billion into Chinese stock markets, while withdrawing $8 billion from other big emerging markets.

Moreover, foreign holding of Chinese bonds has more than doubled, reaching $265 billion since 2017, and the amount is expected to surge five-fold in the coming decade.

Over the last four decades, China has reaped magnificent rewards of opening-up to the world. This will benefit both China and the rest of world. Empirical studies investigating the effects of China's financial sector's opening-up conclude that such openness will alleviate financial constraints and upgrade the financing structure of Chinese enterprises. In other words, by eliminating ownership discrimination and offering more products reducing information asymmetry, China's capital allocation efficiency will improve, and profitable private companies will be better served when there is more competition in the financial sector. Such an improvement would raise China's total factor productivity and boost the economy.

But there exists a huge demand for wealth management services. It is estimated that $20 trillion worth of Chinese family wealth goods could do with better allocation. With the expertise and rich products offered by international financial institutions, the welfare of these families would increase. Historically, integration into the global economy has always been a supporting element of China's historic turn toward market mechanism.

However, opening up the financial services sector does not mean a free capital account in the future. China is adamant on having a macro-prudential framework in its financial management, which means liberalization occurs only when the exchange rate regime and financial regulatory framework are robust and credible enough to manage the relevant risks.

However, opening-up does not necessarily bring about more risks. There might be more complexity in preventing financial risks after liberalization. For example, domestic financial institutions may take excessive risks to maintain profitability or stay afloat. China still needs to maintain its capital management under the current global economic order where the international settlement system has already faced heavy governance deficit.

From a broad perspective, China is welcoming foreign investors, especially in the financial services sector. Nevertheless, this opportunity is mutual. According to McKinsey Global Institute, $22 trillion to $37 trillion economic value is at stake depending on China's global integration. Financial globalization has been China's long-term strategy with scheduled implementation, contributing to a shared future of prosperity.

How will the other world leaders move to deal with the more contentious aspects of advancing further international economic integration?

The author is a research fellow at China Finance 40 Forum and a PhD candidate at Tsinghua University.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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