Evolution Prediction

Based on studies and conclusions, we can make the following predictions regarding the values of F/G, S/G, and S/F (see Table I.14):^[1]

The average annual economic growth rate between 2011 and 2020 will be 8 percent.

- The market value of shares will be CNY 100 trillion by 2020.

- The average growth rate of financial assets is not expected to be much lower than 12 percent. This is calculated as the sum of the average growth rate of the economic growth of the same period (8 percent), plus expected inflation (1-2 percent) and the rate of rise in monetization coefficient (1-2 percent).

Significant differences in specific data are due to fluctuations and uncertainty of the stock market. However, the general trend is shown in

TABLE 1.14 Predicted Values of F/G, S/G, and S/F (2011-2020)

Notes:

1. All figures are estimates.

2. Price factor is ignored in these estimates.

Table 1.14. By 2020, the F/G of the Chinese economy will be approximately 400 percent, S/G will be 100 to 120 percent, and S/F will be approximately 30 percent. Based on this information, China's financial structure will approach or reach the level of developed countries by that time.

Internal Incentives for Market Evolution of China's Financial Structure

A detailed analysis of the internal incentives for the market evolution of the Chinese financial structure is covered in the book Essentials for Analysis of China Capital Market.2 Below is a brief summary of several key areas:

- China's improvement of economic monetization or money supply (M2)/ GDP, paved the way for market-oriented evolution of China's financial structure, without which its market transformation would be suspended. In fact, China's economic monetization (M2/GDP) has maintained an upward trend since the beginning of China's reform and opening-up initiative in 1978, from 32 percent in 1978 to 82.5 percent in 1990,150.6 percent in 2000, 180.9 percent in 2010, and 245.5 percent in the third quarter of 2011 (see Figure 1.5).

Although the constant ascent of M2/GDP has resulted in rising price levels at different stages, it has also been driving the continuous growth of the Chinese economy, more importantly, and has created the market-ended shakeup of the Chinese financial structure. Preference in the distribution of national income has been given appropriately to residents, thereby moderately improving the proportion of this

FIGURE 1.5 Evolution of China Economic Monetization 2Xiaoqui (2006, 47-89).

division in the total pie. This has served as the foundation for the market-tended evolution of the Chinese financial structure. The residents' division becoming the main provider of financial resources for economic growth has posed the following demands for changes in the financial system:

- The financial services offered in the financial system will be efficient, flexible, and optional, in order to meet the constantly escalating financial demands from the residents' division.

- The vast capital surplus in the residents' division requires channels and vehicles for smooth, optional conversion into investments. If the huge monetary surplus in the residents' division becomes the main financial resource for economic growth, the capital foundation will be made available for the development of financial markets, especially capital markets.

One important reason why the market evolution of China's financial structure has been stagnant in recent years is the relative slowdown of the rising incomes in the residents' division. However, with the transition of the economic growth model and reforms of the income distribution regime, incomes in the residents' division are expected to see remarkable growth for a long time. This will facilitate the continuity of the market evolution of Chinese financial structure. The capitalization trend of incomes in the residents' division gives momentum to a market-oriented transformation of the Chinese financial structure. This indicates a rising tendency of the proportion of capital expenditures in residents' incomes seeking capital returns. This concept carries both broad and narrow interpretations. In the broad sense, capital expenditures represent all capital spending, both securitized and nonsecuritized, whereas in the narrow sense, capital expenditures only refer to securitized capital spending.^[2] Studies show that the capitalization of incomes in China's residents' division has seen a constant rising trend,^[3] although fluctuations did occur at times.

• [1] Xiaoqiu et al. (2011).
• [2] Xiaoqiu (2006,56-61).
• [3] Xiaoqiu (2006, 56-61) and Xiaoqiu and Rong (2009).