Analysis of China International Competitiveness of Financial Industry

Analysis of China International Competitiveness of
Financial Industry
LIU Hongkai
School of Social Sciences, Daqing Petroleum Institute, P.R.China, 163318
[email protected]
Abstract: In today's world, financial globalization is one of the important aspects and features of the
economic globalization. Financial globalization has exacerbated the global competition among financial
institutions, it also results in the competitiveness of China's financial industry and international financial
institutions change from the past long-distance competition into the face-to-face competition in the
domestic and international financial markets. How to enhance China's financial industry's international
competitiveness is the key issues of the development of China's financial industry .In this paper, to make
the empirical analysis of the influencing factors of our international competitiveness of the financial
sector, I use the "diamond model" of the Porter's theory of industrial competitiveness, Trade Special
Coefficient and Revealed Comparative Advantage Index analysis methods. I also put forward
countermeasures and proposals to enhance China's international competitiveness of the financial sector,
such as the innovation of system, management innovation, business innovation, human resources
management and strategy and monitory system.
Keywords: Financial industry, International competetiveness, Competitiveness indicators, Financial
innovation
1 Introduction
A country's financial sector in order to obtain a favorable market position and achieve economic
self-interest while taking the social benefits into account competes with other countries. The
international competitiveness of the financial industry is such ability. It’s an ability to win the opponent
in competition. It’s also an ability to maintain durable competitive advantage of the entire national
financial system.
Since the 1990s, with the rapid development of the financial globalization, the financial sector has
become the core of the national economy. The international competitiveness of the financial sector
attracts broad attention, and it becomes the hot spots of the research in competitiveness. The theories of
competitiveness are also developed rapidly, and the representative ones are Evaluation methods of The
World Economic Forum and the Management School of Lausanne, Switzerland, and the Theory of
Harvard Business School professor Michael. E. Porter. In this paper, according to diamond model of
Porter's theory of industrial competitiveness, I do research on the enhancement of the international
competitiveness of China's financial industry. I hope it can be beneficial to the sustainable development
of China's financial industry.
2 The influencing factors of our international competitiveness of the financial
sector
Michael.E.Porter thinks that there are four factors
which can infulunce the international
competitiveness of specific industries; they are factors of production, state of needs, related industries
and supportive industries, as well as corporate strategy and competition. The role of the four elements of
a two-way constitutes a "diamond model." In addition, there are two variables, opportunities and the
Government. The opportunity is beyond control, and the impact of government policies can not be
ignored.
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Opportunitie
s
Business Strategy and competition
Demand conditions
Elements of production
Related industries and supportive industries
Government
Figure 1 Porter’s “diamond model”
2.1 Elements of production
The financial industry elements of production mainly refer to each kind of essential factor which the
development of financial industry needs, including the input of capital, the financial theory and
experience, product innovation, modern communication and information highly educated manpower,
research institutions and other elements of the composition of the high-level production factor. In
modern society, the importance of the basic factors of production has become increasingly small, and
the high-level factors of production play a more important role. Human capital for each additional 1%
can increase the trade volume of financial service and insurance service by 6.58 %.
After 30 years’ reform and opening up, China's financial sector in the input factors of production, has
already had fairly sound foundation. In total assets, the proportion of the financial services industry in
GDP rises from 1.9% in 1978 to 4.4% in 2007, and the total assets of the banking industry were more
than 50 trillion Yuan, with a variety of the nature of banking institutions in the development of
innovation. However, there is a big gap between the Chinese and international financial services
industry in research of finance theory and practical experience. The short history of China's financial
industry and less experience directly constrained the research of relative financial theory in the securities
and insurance industry, especially in the securities and insurance industry being at the stage of following
the world trend; they are not capable to provide with intelligence support for the development of China’s
financial sector independently and innovatively.
2.2 Demand conditions
Domestic demand is the fundamental driving force for China's financial industry development, including
the structure of domestic demand, the scale of demand and demand growth. After 30 years’ rapid growth,
China has entered the ranks of world economic power. In 2008, the GDP was more than 30 trillion Yuan,
and foreign exchange reserves reached 19,500 U.S. dollars. Such a large-scale capital flow urgently
needs financial support form the industry. The huge market demand is the advantage of China's huge
financial development.
2.3 Related industries and supportive industries
In order to obtain long-lasting competitive advantage, in the international community, it is necessary for
the financial sector to have supportive and related industries with competitive power at home. The
development of related industries has a direct impact on the competitiveness of the financial industry,
and the improvement of the financial industry, in turn, promotes the upgrade of related industries. The
rapid development of our country’s information industry provides conditions for financial institutions to
develop related services. The improvement of the banking infrastructure, such as the update of
high-power fiber optic cables, electronic equipment strengthens business ties of financial organs and
the launching of bank card business, so that the degree of electronic in our financial institutions
improves steadily. At the same time, the real estate and the prosperity of the manufacturing sector in the
real economy in turn has also led the expansion of financial assets.
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2.4 Strategic organization and competition of the enterprise
The international competitiveness of the financial sector ultimately depends on the formation of
financial firms, and the competitiveness of financial enterprises is bound to define the size of the
international competitiveness of industries. Financial business strategy and competitiveness of
organizations include the establishment of financial business, organization, the environment of
management and the domestic competitive environment. One country’s competitive market structure
would have a significant impact on the competitiveness of financial enterprises, competitive which is the
most powerful incentive to create and maintain a competitive advantage. Domestic competition would
force financial firms to update products, improve production efficiency in order to achieve a lasting and
unique advantage. In addition, fierce competition will force domestic financial enterprises to go abroad
to participate in the international market. Therefore, after fierce competition domestic financial firms
tend to be more mature, more competitive and easier to win in international competition.
In addition to these four main factors, there are two important variables which have an important impact
on the international competitiveness of the financial sector, the opportunity and the Government.
Opportunities (such as war, financial markets or major changes in exchange rates, introduction of new
technologies, etc), on the competitiveness of the financial industry is not a decisive impact. The same
opportunities to different financial institutions may result in different effects and the possibility of using
the opportunities and the way of using the opportunities still depend on the four basic factors. The
Government’s impact on the international competitiveness of the financial sector lies mainly on the
guiding and promoting of the four determinants. Because it is the financial firm, not the Government
that engages in the financial competition the creation of competitive force must be reflected in the
business in the end.
3 The empirical analysis of international competitiveness on China's financial
industry
3.1TC-based indices for analysis of international competitiveness
Trade Special Coefficient index, also known as the competitive advantage of trade index is the
difference between import and export trade of a country's total foreign trade volume accounting for the
proportion. It can measure situation of export competitiveness of the industry in the international
market.
TC=(Xij-Mij)/(Xij+Mij)
This formula, Xij and Mij, respectively, represent the ith country’s jth product’s total volume of import
and export. TC ranges from [-1, 1]. TC values is closer to 0, that is closer to the average level of
competitive advantage, when the TC index value is above 0, the competitive advantages is great, and
what’s more, the closer it is to 1, the greater and more intense and competitive the industry is. On the
contrary, the competitive power of the industry is smaller.
Year
TC
1998
0.647
﹣
Table 1 1998-2006 A competitive advantage Index of financial service trade in China
1999
2000
2001
2002
2003
2004
2005
2006
0.738
0.865
0.790
0.855
0.823
0.859
0.827
0.844
﹣
﹣
﹣
﹣
﹣
﹣
﹣
﹣
This form shows that China's financial service competitive advantage is close to -1, and it also shows its
disadvantage in international competition, its extreme weakness in international competition, and its
declining trend year by year. If the situation goes on, and if the financial industry, one of the most
important foundations of the national economy, becomes more liberalized, it is bound to bring about
adverse effects on the national economy.
3.2 RCA-based indices for analysis of international competitiveness
Revealed Comparative Advantage index, also known as revealed comparative advantage index, is the
most convincing indicator measuring a country's products or industrial competitiveness in the
international market. RCA index is designed to quantitatively describe relative export performance of
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various industries within a country. RCA index of a country refers to some kind of export industry's
share of its total exports and total world exports of such goods. The ratio of the share of exports is
expressed by the following formula:
RCAij = (Xij / Xtj) / (XiW / XtW)
In this formula, Xij that j country i’s export value of domestic exports, Xtj that country j's total export
value; XiW the world that exports the value of i's exports, XtW that the world's total export value; If
RCA> 2.5, it indicates that the service is extremely competitive; If 1.25
RCA
2.5, it indicates that
services of the country has a strong international competitiveness; If 0.8
RCA 1.25, it indicates the
moderate international competitiveness of services; If RCA <0.8, it indicates the international market
does not have comparative advantages, and the international competitiveness is relatively weak.
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≦
≦
≦
Table 2 China, Japan, South Korea RCA index of finance and trade
Year
2000
2001
2004
2005
0.030
0.035
0.015
0.032
0.016
China
0.582
0.613
0.650
0.625
0.842
Japan
0.387
0.314
0.365
0.305
0.384
South
Korea
Source: UNCTAD Handbook of Statistics On-line (2006) data calculated.
0.028
1.154
0.788
Category
Financial
Except
insurance
2002
2003
Table 2 shows that among Japan South Korea and China, the RCA index of Japan is the highest, in 2005
to 1.154 and its value is above 1.This shows that Japan's financial services trade has the revealed
comparative advantage, and its financial services trade in the international competitiveness is relatively
strong. While South Korea and China are less than 0.8, so international competitiveness of these two
countries’ financial services are relatively weak. Especially China, its international competitiveness
of financial services is weak, with the RCA index of 0.028 in 2005, below 0.1.
The above indicators show that China's financial and trade competitiveness index is the negative,
indicating a lower level of comparative advantage index than that of a normal one, which is far below
the world average. So it’s necessary to enhance the international competitiveness of China's financial
industry.
4 The path to enhance China's international competitiveness of the financial
industry
4.1 System Innovation
Institutional innovation is a guarantee to enhance the competitiveness of the financial sector. From a
global point of view, the financial innovation promotes the dramatic change of the financial industry.
Both the financial applications of modern technology and the development of varieties of financial
services have made a revolution in the financial sector. However, institutional innovation of China’s
financial sector has difficulties, having become a constraining bottleneck for leap-forward development.
Thus, in domestic financial markets and international financial markets, in the framework of financial
globalization, in order to adapt to the new financial environment, only the domestic financial sector
follow the domestic financial system innovation, can it adapt to the new financial environment gradually,
increase
the ability to compete with foreign financial institutions and win the survival and
development.
4.1.1 Innovation of property order
Innovation of property order is the basis of banking business innovation in our country. Property
relations fundamentally stipulate decision mechanism, operating mechanism and incentive and
restraining mechanism with arrangement of organization. They also decide behavioral objective of
banking institution and operating principles. Furthermore, they impact operating efficiency of banking
institution and distribution resources, and diverse the transformation of implementing property order.
Implementing the system transform of diverse property order can make non-state-owned assets of
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shareholders and managers of state-owned assets share responsibility for the choice and supervision of
financial agencies operators together, avoid a variety of problems due to ambiguous property rights., and
thus promote both domestic financial agencies and foreign organs compete fairly in system and
mechanism.
4.1.2 Organizational structure innovation
Along with the change of domestic and foreign market environment, unifying our financial industry to
practice the trend of joint stock system, the domestic financial organ should carry out the reorganization
and reformation in the organizational structure aspect, fully achieves an effective use of internal
resources and exterior resources, and persists in constant annexation reorganization and internal
organization conformity in order to become the financial holding company gradually and carry out
omni-directional financial service. At last, it is an effective choice of organizational structure innovation
to choose one kind relatively mature and perfect organizational form of financial holding company as
holding groups created by the state-owned financial organs through drawing on the international
experience.
4.1.3 Administration structure innovation
When carrying out the system innovation, domestic financial industry should be carried the standardized
corporation transformation and land the principals” clear power and responsibility, separating
government administration from enterprise management and the effective management”) on feet. First,
Proper separation should be kept between the actions of the board and the manager, which should lay
obvious emphasis on the importance of the interior administration on the board. It can be achieved by
introducing a representative of national assets, an independent individual. Second, the legal system of
self-responsibility for profits and losses should be implemented, in which the legal representative takes
limited responsibility according to the assets. Third, a restraining mechanism should be applied to the
professional manager, which means restraints of the interior inspection by the board as well as the
shareholder representative assembly, and restraints of exterior flow of property right together with the
malicious purchase in the capital market. At last, the encouraging mechanism of holding shares and
increasing proportion of the shareholders’ shares.
4.2 Management innovation
Management innovation is the foundation of promoting the competitive power of the financial industry.
The choice of management and operation pattern needs to consider the financial organ corporation
developmental strategy, the union service development demand, risk control, the management of the
platform chain link, the external environment, as well as staff’s qualification promotion factors and so
on. The choice should avoid non-voluntary adjustments caused by passive adaption to market
environment and the waste of resources of its own resulting from it. In order to achieve administration
innovation, the following three aspects should be taken into account: decision-making system, risk
control and the sharing of resources.
4.3 Business innovation
In order to adapt to the demand of versatility of the international corporations and big groups and their
large-scale restructure, developed countries loosen the control on financial industry and broaden the
separating condition of management between banks, bond businesses and securities. Under the
influence of the demand for versatility and comprehensive financial service in the fierce competition in
international finance industry. The development of the mixed economy has become an inevitable trend
for China's financial industry to enhance the competitiveness. On one hand, we should gradually
construct a new system of financial administration, including mixed managements and classified
monitoring. On the other hand, we should promote the merger and acquisition between banks,
strengthen their capacity in the international market with the development of their business at home,
broaden their ranges of services and achieve overlapping sales between different financial institutions.
4.4 Management strategy innovation of human resources
As the most active factor, human resources play an important role in the struggle of our nation’s
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financial industry against the outer pressure in the competition. To the final analysis, the competition in
financial sector is the competition of employing financial talented persons, especially the internationally
financial talents on the core level and in a core position. It is an urgency to cultivate and administer our
own brain in finance. In order to achieve our international competitiveness in finance, it is fundamental
to train and employ highly qualified individuals equipped with knowledge of financial trade, the
operation of new products in international financial market and foreign languages.
4.5 Innovation of financial supervising and managing system
Regarding various countries’ experience, the financial industry tends to undergo a comprehensive
management development after the divided management. Finance management and supervision system
is also having a tremendous change. We should study early and adapt it to the Chinese characteristic
financial supervising and managing system in a planned way in order to enhance effectiveness of
financial supervising and managing. First, we must formulate the financial warning target system abroad
and at home. It aims to enhance the guard melt finance risk the foresight, pointed and quick reaction
capability, according to making every effort to keep supervising and managing target data automaticly,
to track the monitor promptly and to analyze the change of each target; Second, we should establish
the computerized non-scene inspection system as soon as possible, and then realize the non-scene
inspection computerization standardization and the sequencing, providing the accurate information to all
existing and the potential depositor. Third, we should take the profit and the property quality as the
central target system, and the board of directors inspecting the achievement of financial organs to effect
prompt, reliable, and accurate information disclosure system; Fourth, we should adapt to the request that
the process of our financial liberalization, internalization, collectivization and comprehensive aspect
gradually. We should pay more attention to the enhancement of finance supervising and managing
talented person's cultivation and the financial supervising and managing method renewal. Finally, we
also form three-in-one combination surveillance mechanism constituting of specialized supervising and
managing of the finance supervising and managing system, commercial bank shareholders’ internal
surveillance and the socialized surveillance of facilitating agency.
5 Conclusion
According to the empirical analysis of the impact of China's financial industries' international
competitiveness and the international competitiveness of the financial sector, we found that China's
financial industry has developed thanks to the nurture of the huge domestic market demand, and our
government's strong support. In the financial resources aspect, our country was already a financial
power, but is not the most powerful nation. Looking from the interior, the somewhat low capital in cash,
the unitary product, the innovation in sufficiency, and the income structure depending on factors such as
spread continue to restrict the financial industry development seriously. From the outside, after China's
full liberalization of financial markets, the financial industry faces more stringent regulation and strong
competitors. At the same time, the macro economic environment maintaining stability with difficulty in
the short time will intensify the operational risk financial industry of financial industry, and affects the
enhancement of the financial industry’s international competitiveness. Therefore, we should make full
use of the advantage of huge domestic market demand integrate existing elements of production and
financial resources positively , strengthen the development of related industrial, and formulates the
correct enterprise development strategy in line with the reality and form the reasonable competition
pattern. Based on this, we can carry on the financial system innovation, the management innovation, the
service innovation, human resources management strategy innovation as well as the financial
supervision system innovation to promote the Chinese financial industry international competitiveness
enhancement, so that provide powerful financial backing for the sustainable development for our
country economy.
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