Marketization of capital is the process during which economic entities make their investments and financings on the basis of market rules. In a country in economic transition, marketization of capital also serves as the process to reform the investment and financing mechanism. Compared to the traditional highly-centralized system of planned economy under which the whole society's investment in fixed assets and other funds were allocated free of charge according to investment plans and financial budget of the government, marketization of capital means that the funds used for the whole society's investment in fixed assets or enterprises' expanded reproduction are no longer coming from governmental appropriations, but to be raised by ways of using commercial credits, securities and foreign funds with compensation, with an aim to eliminate the distortion of capital price that the government intervention may bring about. With the continuous deepening of the reform toward a market-oriented economy system, capital being a production factor, its free flow and efficient distribution must be performed toward the price-oriented goal under the regulation of market supply and demand.
Ⅰ.Comprehensive Analysis on Marketization of Capital in China
The analysis on the maketization of capital in China can be started from either of the following aspects: capital distribution, or its flow, and capital acquisition, or resources. During the process of establishing and improving the socialist market economy system in China, the marketization of capital mainly shows that the government gradually withdrew from its position as the sole capital supplier to realize the diversified capital supplying, for this reason, our analysis shall be mainly made in terms of capital resources. According to the current statistics means in China, the total investment in fixed assets mainly comes from the following aspects: state budgetary appropriation, domestic loans, foreign investment, fundraising and others. Next, we shall analyze the developing conditions of the marketization of capital in China and study the important role of the securities market in the marketization of capital.
(l) State Budgetary Appropriation
State budgetary appropriation is the main tool by which the government participates in the investment, and its scale and investment direction are still controlled by the government through plans. So, the proportion of its investment scale in the total investment in fixed assets by the society as a whole may serve as an important index measuring the marketization of capital. However, we should make sure which factors determine this ratio: the systematic factors or the short-term policy regulations? In case the systematic factors put this ratio in a large number, it would mean a low or declining degree of marketization; in case the policy factors lead to the changes of this ratio, then no conclusion could be drawn in respect of the degree of market-oriented development of investment and financing. In 1996, the proportion of state budgetary appropriation in the total investment in fixed assets reached its lowest point in history, accounting for only 2.7 percent, which means a considerable progress in marketization of capital in China. After the Asian Financial Crisis broke out in 1997, the Chinese government adapted aggressive monetary and financial policies in order to keep the economy growing in a continuous, fast and healthy way. The increases in the issuing scale of construction bonds and in the governmental investment scale resulted in an increase in the ratio of budgetary appropriation directly controlled by the government, reaching 6.7 percent in 2001. However, the increase of the ratio cannot be taken as regression in the marketization of capital in China. When faced with the economic depression, the western developed countries also carried out aggressive fiscal policies, resulting in increased direct or indirect investments by the government. which had nothing to do with the systematic factors.
Since the state has changed its policies in providing funds to state-owned enterprises from appropriations to loans, the original free appropriation relation between state-owned enterprises and banks was completely broken, and was replaced by credit relations on commercial terms. So, loans for the domestic banks are the important channel and main mark for resources of marketization of capital in China. The proportion taken by domestic loans may be partially used to measure the marketization of capital.
Combining both the above tables, we can draw the following conclusions: firstly, the loans for the state policy banks, viewed from either the absolute quantity or the relative quantity, witnessed a reducing trend since 1997; while there has been a sharp increase in the loans from commercial banks, which reached 92 percent in 2001, occupying an absolutely dominant position. This means a remarkably high degree of marketization of capital in China. Secondly, the ratio of domestic loans in the total social investment in fixed assets has been basically kept at about 20 percent since 1995, reflecting the supply and demand of funds between enterprises and the banks are on the whole market determined. Thirdly, Proportion of State budgetary appropriation in total investment in fixed assets, it is clear that the ratio of loans has remarkably surpassed the funds by state budgetary appropriation, reflecting an increased ratio of those economic entities that make their financings through market.
The increased ratio of commercial loans in the total volume of loans and the stabilized ratio of policy loans reflect in a way that marketization of capital in China has reached a higher level. In 1995, the Commercial Bank Law of the People's Republic of China clearly defined that the commercial banks would make their own management decisions, take their own risks, bear full responsibility for their own profits and losses to achieve balance by their own efforts. They are to establish a well-designed anti-risk mechanism and independently take the civil liabilities based on their total property held by the legal person. Therefore in providing loans, the commercial banks are aiming at higher profits and less risks under relatively clearly defined property rights, and the traditional means by which the state freely provided the appropriations according to plans has been basically changed. In 1994, the State successively established the China Development Bank, the Export-Import Bank of China and the China Agricultural Development Bank, which are the policy banks in China. The policy businesses formerly conducted by the four major state-owned banks were transferred to these policy banks, mainly aiming at cooperating with the state industrial policies to speed up the development of those areas in which the private funds are not interested, to lead the development of basic industrial areas, to support the disadvantaged industries and to optimize the economic developing environments for higher international competitiveness. In respect of decision-making concerning the directions, the sizes and the interest rates of loans to be granted, policy loans are heavily influenced by government policies and are not to operate in full compliance with market rules. So, the ratios of the policy loans and commercial loans shown in the above table may basically reflect the degree of restrain in the loan market of China's banking industry.
According to relevant statistics, the majority of bank loans flowed into the state-owned sector or the sectors that were mainly state-owned. Some people therefore believed that this was caused by an incomplete reform in the state-owned commercial banks and the discrimination of loan against the individual and private sectors, indicating a very low degree of marketization of capital in China. In fact, the flow of loan relates to both the lenders and borrowers. With the reforms in hank property mechanism and operational mechanism, the state-owned commercial banks shall treat enterprises of different ownerships equally. Due to the small size of the individual and private enterprises and quite a number of them scattered in the small townships and even in rural areas, the trading cost for the bank credits is comparatively high. While state-owned enterprises are centrally located in the big and medium cities and engaged in the traditional industrial areas, and the banks are relatively familiar with the investing profits and developing prospective in these areas leading to a relatively high information transparency and low trading cost. So, there exists a higher percentage of the state-owned sector in the commercial loans. But in the recent years, there has been a trend to increase the loans for the non-state-owned sectors, and this problem will solved gradually.
(Ⅲ) Foreign Investment
The level of the foreign investment is the reflection of a sound market environment. Meanwhile, the foreign investment is aimed at maximization of profits, and its whole operation is market-oriented. So, the ratio of the foreign investment in the total investment in fixed assets is able to reflect the degree of marketization of capital in China to some extent.
Judging from the average developing level during the past 10 years, the ratio of the foreign investment to the total investment in fixed assets reached 8.21 percent, higher than the record 6.7 percent that the ratio of budgetary investments has reached after China adopted the positive fiscal policies. Although there has been a decrease year by year in the ratio of the foreign investment to the total investment in fixed assets due to the bad effects brought about by the Asian Financial Crisis since 1997, the actually employed foreign investments still reaches US$4.67 billion in 2001, of which the direct foreign investments accounts for US$46.88 billion, ranking 8th place in World Investment Report of the United Nations Conference on Trade and Development and becoming the leading one among the developing countries.
(Ⅳ)Enterprise-Raised Funds and Other Financial Resources
Enterprise-raised funds for expanded reproduction consist of both the accumulation of their own funds and the stock financing. Although their own funds are not acquired through the stock financing, they contain opportunity costs as well and shall be allocated by referring to such market price factors as interest rates and dividends rather than free of charge. so it may be considered to be market-oriented.
In view of the changing situations during the past 10 years, this portion of funds witnessed a slow-growing trend basically, and it reached 69.6 percent in 2001, which was the highest level since the reform and opening up in 1978. It indicated that the marketization of capital in China was on a higher level and that the method to raise funds by the Chinese enterprises was improving.
(Ⅴ) Direct Financing
The development of all countries around the world shows that there are diversified channels for enterprise financing, including not only the indirect financing method characterized mainly by the bank loans, but also the direct financing method through securities market. The emergence of bond market and stock market marks that the financial transaction activities begin to operate according to the market rules, and show enormous market vitality, and its development level becomes the important standard measuring the marketization of capital in a country. China speeded up the development of the securities market during its reforming process. In 1990, when China had just established its stock market, there were only 10 listed enterprises; by 2001, the listed companies in China had reached 1160, with a total market value amounting to 4,350,000 million yuan, and a circulating market value of 1,450,000 million yuan. The speedy development of the capital market not only provided a strong support of funds for China's economic growth, but also remarkably promoted the marketization of capital in China. We shall discuss the development of the securities market in the following aspects:
1. Rate of Securities Financing
The rate of securities financing is the ratio of the market value of stocks to GDP. It is used to measure the relation between direct financing and economic development and is also an important index reflecting the marketization of capital. Because of the non-circulation of state-owned shares and corporate shares, we shall discuss the maketization of capital by way of presenting the ratios of total market value and market price respectively to GDP.
2. Proportions of Direct Financing and Indirect Financing
The rapid development of the stock market is also reflected in the changing ratio between funds raised through stock sale and added volumes of bank loans. This ratio in fact reflects the financing structure in the whole capital market and the financing situations in the securities market, and also indirectly reflects the effects that different means of financing may bring about in the field of enterprise ownership structure, operation achievements, restraints on operator's behavior.
The relative data shows that there is a steady growth both in the ratio between funds raised in Chinese mainland and added volumes of bank loans, and in the ratio between funds raised in Chinese mainland and added volumes of state-owned bank loans, which indicates that the proportion of direct financing is increasing, funds raised through stock sale is playing more and more important role in the capital formation, and the free flow and efficient allocation of capital are upgrading. A mechanism of "voting with one's feet" is gradually strengthened, and the capital market is becoming more and more active.
(China.org.cn November 7, 2003)