Vigorously Enhancing the Competitiveness of China’s Financial Sector

Past experience shows that the rise of major countries is always underpinned by robust financial systems, and that a truly great power must be a financial powerhouse. The Recommendations of the Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan for National Economic and Social Development, adopted at the fourth plenary session of the 20th CPC Central Committee in 2025, marked the first time that the goal of building a financial powerhouse was incorporated into a five-year plan, elevating it to a mid- to long-term national development strategy.

Since the launch of reform and opening up in 1978, alongside economic restructuring and the development of the socialist market economy, China’s financial sector has transformed from a highly centralized, monolithic model into a full-fledged modern financial system. This system now encompasses regulation, markets, institutions, supervision, products and services, and infrastructure. Importantly, China has avoided major financial crises that could have disrupted its economic growth and has effectively contained systemic risks— an achievement unmatched among major countries. As a result, the financial sector has provided strong support for China’s economic development. China can now be regarded as a major financial country, with the competitiveness of its financial sector improving significantly. By all major indicators of scale, its financial sector ranks among the world’s largest. As of 2025, China’s banking sector ranked first globally in total assets. Its foreign exchange reserves had remained the largest globally for 20 consecutive years, and its insurance industry, as well as stock and bond markets, ranked second worldwide.

However, we must remain clear that while China is a major financial country, it is not yet a financial powerhouse. The gap is most evident in the overall competitiveness of its financial sector, which is reflected in three main areas.

First, the efficiency of the financial system remains relatively low. We need to further optimize the functional positioning and structural layout of the financial sector and enhance the effectiveness of financial supply. Financial institutions still face constraints in delivering coordinated services. Meanwhile, pressure to resolve existing financial risks remains substantial, and the capacity for risk prevention and control needs to be strengthened.

Second, the quality and efficiency of financial services for the real economy are suboptimal. Financial institutions have limited capacity to mobilize savings and channel them into investment, resulting in persistent idle funds. Imbalances in the distribution of returns from financial assets point to service shortcomings, while the value transmission mechanism has weakened. The financing structure does not adequately match the needs of the real economy, direct financing remains underdeveloped, and financial support for innovation-driven growth and industrial upgrading is insufficient. In addition, disparities persist across regions and sectors, with inadequate financial coverage of weak areas.

Third, China’s position in international finance remains weak and does not yet fully reflect national strategic objectives. There is still much room to improve financial services for Chinese enterprises entering the global market, and further progress is needed in opening up financial markets. Moreover, China’s international financial standing is not commensurate with its economic weight and its global financial influence requires urgent enhancement.

At this historic stage of transitioning from a major financial country into a financial powerhouse, China must move faster to strengthen the competitiveness of its financial sector. It must make solid strides to prevent financial risks, tighten regulatory oversight, and advance high-quality development. It must place particular emphasis on achieving breakthroughs in a number of fundamental and overarching issues of overall importance.

First, enhancing competitiveness requires a deep understanding and proper handling of the relationship between finance and the economy

The competitiveness of the financial sector does not exist in isolation; it must rest on the sound development of the real economy. In essence, the relationship between finance and the economy is one of service and support. The US subprime mortgage crisis and the European sovereign debt crisis have clearly shown that as finance assumes a more prominent role in the economy, it can be increasingly destructive. It is increasingly evident that modern economic crises originate in the financial sector and then spread to all other areas, magnifying their impact on society. The root cause of this lies in finance having detached itself from, and even placed itself above, the real economy, inflating and circulating within itself, becoming a tool for capital and a minority of individuals to rake in wealth. China has also encountered problems such as high interest rates, wide lending-deposit spreads, and difficulties in accessing affordable financing. At one point, the value added of the financial sector accounted for over 8% of GDP, nearly on a par with the levels in the US and the UK. We must clearly recognize that the financial sector is a vital modern service industry whose value comes from its contribution to the real economy. The high value added of the financial sector does not necessarily mean that finance is highly efficient in serving the real economy, much less that the sector is genuinely competitive. Blindly pursuing excessively high value added may instead cause finance to become decoupled from the real economy, ultimately backfiring on the sector itself.

We must straighten out the relationship between finance and the economy to ensure that finance fulfills its fundamental role of serving the real economy. By making effective use of finance as an instrument for resource allocation, we can channel resources through price mechanisms to the most efficient sectors and enterprises, enabling the financial sector to grow by promoting the development of the real economy, thereby creating a virtuous cycle between finance and the economy. While growing the economic “pie,” we must also share it fairly. It requires us to give full play to the guiding and signaling role of financial markets, keep financing costs at reasonable levels, and direct resources toward major national strategies, key areas, and vulnerable areas.

A client in consultation with a wealth management advisor about cross-border financial services at the Jinrongjie Sub-branch of ICBC Beijing Branch, January 29, 2026. ICBC

Second, promoting high-quality development of the financial sector along market-oriented lines, thereby unlocking its internal growth drivers and enhancing its competitiveness

Competition is an intrinsic feature of a market economy, and an appropriate degree of competition is key to improving both efficiency and competitiveness. China has been working to enhance the competitiveness of its financial sector by increasing the number of financial institutions, with banking legal entities exceeding 4,000 by 2025. However, this expansion has also led to some problems, with some small and medium-sized financial institutions pursuing blind growth and engaging in undifferentiated competition, thereby generating risks. The intensity of competition depends not only on the number of market participants, but more importantly on whether potential entrants can access and take part in market competition. China generally operates under a separate operation model, which curbs risk transmission, especially across different markets. Nevertheless, this model also, to some extent, fragments the financial system, hindering the free flow of services, data, capital, and resources. This results in limited coordination in the use of financial resources and difficulties in optimizing fund allocation. Appropriately relaxing restrictions on financial services while ensuring safety can boost the competitiveness of the financial sector. It must be noted that competition and regulation are not mutually exclusive; rather, they must be dynamically balanced. Strict regulation provides the foundation for orderly competition and serves as its safeguard.

We must make continued efforts to refine the competitive structure in the financial market. On the one hand, we must actively address the risks of small and medium-sized financial institutions by reducing excessive numbers while improving quality, and by supporting these institutions in developing differentiated competitive strengths. On the other hand, we should gradually relax undue restrictions that stifle competition, promote the integrated development of the financial system, and build a large, unified, and open financial market that ensures orderly competition and facilitates the optimal allocation of financial resources. At the same time, while keeping risks under control, we must explore ways to deepen cooperation between banking, securities, and insurance sectors in areas such as wealth management, asset management, and risk management. By promoting service innovation and integration, the financial sector can enhance its overall service capacity and strengthen its competitiveness. In addition, we need to encourage more market entities to participate in financial competition, so as to unleash market vitality. We must establish and improve a market-based exit mechanism for financial institutions, whereby the survival of the fittest presses them to upgrade service quality and efficiency.

Third, improving the alignment between the financial structure and economic development and increasing the competitiveness of the financial sector through structural optimization

The financial structure and the direction of financial development are determined by the economic structure and the economic development strategy. The relationship between finance and the economy is dynamic, and the degree of alignment directly affects the quality, efficiency, and competitiveness of financial services. Generally, a bank-based financial system is better suited to the stage of factor-driven industrialization, in which funds tend to flow into relatively mature sectors and firms. In contrast, at the innovation-driven growth stage, a market-based financial system is better aligned with this stage, as its risk-dispersion mechanisms significantly boost the efficiency of capital allocation. China has a typical bank-based financial system, with banking assets accounting for about 90% of the total assets of financial institutions and over half of personal savings held in banks. Given the wide gap between the traditional financial structure and the demands of innovation-driven economic development, improving the alignment of the financial structure is a top priority for enhancing the competitiveness of the financial sector.

To adapt to the economic transition from factor-driven to innovation-driven growth, it is imperative to accelerate the shift toward a dual-pillar financial system in which banking and capital markets develop in a more balanced manner, while making breakthroughs in developing science and technology finance. On the one hand, we should leverage the funding advantages of the banking system by innovating credit models and applying financial technology to ramp up medium- and long-term funding support for high-tech enterprises and strategic emerging industries. On the other hand, we should vigorously develop the capital markets, raise the share of direct financing, and provide full lifecycle financial services for scientific and technological innovation.

First, we must eliminate bottlenecks hindering the entry of long-term capital to the market. By advancing institutional reform, we can break down barriers to the entry of long-term savings into the capital markets. This will not only raise fund returns but also inject fresh resources into the capital markets, with these savings becoming a vital source of long-term and patient capital. Second, we must work hard to foster world-class investment banks. At present, securities institutions account for less than 4% of total financial assets, and their scale and capabilities fall short of what is required to support technological innovation. We need to help them become internationally oriented comprehensive service providers. This involves supporting leading securities enterprises in expanding their global business footprint through mergers and acquisitions (M&A) and establishing overseas subsidiaries, with a focus on strengthening their high-end service capabilities in cross-border M&A, overseas IPO underwriting, and global asset allocation. Meanwhile, we should also encourage cooperation and exchanges with leading international investment banks to introduce advanced business models and risk management practices, thereby elevating the overall level of professional services.

Fourth, advancing high-standard financial opening up and enhancing competitiveness through openness

A high level of openness is a distinctive feature of a global financial powerhouse. Pooling global financial resources and allocating them efficiently worldwide represents an advanced way of leveraging both domestic and international markets and resources. To achieve this, we must start from institutional opening. This requires aligning domestic rules, regulations, management, and standards with international practices to foster a market-oriented, law-based, and world-class business environment. Such efforts will help improve domestic institutions and enhance the international competitiveness of the financial system. China has now completely removed foreign equity caps in banking, securities, and other sectors. All 24 global systemically important banks (G-SIBs) have established a presence in China and nearly half of the world’s top 40 insurance companies have entered the domestic market, engaging in a wide range of business activities. However, there is still considerable room and potential for financial opening. Foreign institutions currently account for less than 2% of the total assets of China’s financial sector, and foreign investors’ holdings of domestic stocks and bonds are below 4%. This level of RMB internationalization is not yet commensurate with China’s status as the world’s second-largest economy and as a country with a financial market ranking among the largest globally. There is an urgent need to integrate existing opening-up channels. By advancing institutional opening in both financial services and financial markets, we should enhance the capacity of financial institutions to provide cross-border RMB services and promote capital account opening. This will enable foreign investors not only to access, but also to be willing to hold, RMB-denominated assets.

At the same time, we must coordinate financial opening and security to provide a firm guarantee for increasing competitiveness. Opening up does not mean deregulation. With steady and prudent progress, good planning, and effective risk control, we should achieve a dynamic balance between openness and security through sound institutional design and technical safeguards. This includes improving macro-prudential regulatory frameworks for cross-border capital flows, strengthening investor protection, and conducting regular stress testing. Amid increasingly complex geopolitical competition and rising unilateralism that is disrupting the global financial order, the importance of managing risks through institutional opening has become more pronounced. We must maintain strategic resolve, continue to deepen institutional opening in the financial sector, and avoid allowing external uncertainties to slow our pace. At the same time, we should accurately calibrate the timing and intensity of opening up, making dynamic adjustments in line with the resilience of the domestic financial system and changes in the international environment, so as to continuously enhance the overall competitiveness of the financial sector.

Fifth, improving international financial governance capacity and enhancing competitiveness by leading global reforms

Strengthening international financial governance capacity has a direct bearing on the security of China’s financial sovereignty. Currently, the rise of emerging markets and the mounting debt pressures in some developed countries are reshaping the global balance of power. Deficiencies in global economic and financial governance are becoming more pronounced, and calls for reform of the international economic order are growing stronger. As the world’s second-largest economy and largest developing country, China’s outward foreign direct investment has grown from US$59.6 billion in 2004 to US$3.1 trillion in 2024, accounting for 11.9% of the global total. China must actively assume its international responsibilities and obligations through translating its advantages of trade surplus and international creditor strength into a constructive force in multilateral governance, enhancing its voice in global financial governance, and steering the global economic order toward a more just and equitable direction.

We must implement the Global Development Initiative and the Global Governance Initiative. Upholding and safeguarding true multilateralism, China should give full play to its leading role as a major country by actively participating in international financial governance and cooperation. It must conduct pragmatic bilateral and multilateral monetary and financial cooperation, engage in global macroeconomic policy coordination, and participate in the formulation of international financial regulatory rules. Furthermore, it must strengthen regulatory capabilities commensurate with a high level of opening up, and advance the development of a diversified, efficient global financial safety net. Meanwhile, China must advance RMB internationalization in a steady, prudent, and orderly manner. This entails improving the RMB’s functions in pricing, payment, investment and financing, and its role as a reserve currency, optimizing the global RMB clearing network, and enhancing the attractiveness of RMB-denominated assets, thereby providing strong support for countries using the RMB.

Ding Zhijie is Professor and Director of the Research Institute of the People’s Bank of China.

(Originally appeared in Qiushi Journal, Chinese edition, No. 3, 2026)