A Study On China's Financial Security

Since 1980s, with the increasing freedom of international capital flows and the expanding financial strength of institutional investors, the financial speculation and financial crisis have occurred continually in the whole world. After the outbreak of financial crisis in Southeast Asia, almost all the countries in the world are beginning to take the financial security as a core problem in national security strategy and give priority to it. Nowadays, the global economic crisis triggered by US sub-prime crisis is spreading, and how to implement effective institutional arrangements, set up a self-contained financial safety net, prevent and hold back the risk of China's financial security is a very imminent practical subject.At present, researches on financial crisis and financial security by scholars domestic and overseas are voluminous and fruitful. Some domestic scholars put forward many conclusions benefit to China's financial security through qualitative and quantitative analysis on the issue of financial security from different angles, which focused on the specific design and quantitative analysis of risk indicators in a running country's financial system. However, the study on the behavior of financial security-related participants through a variety of specific risk indicators is scarce, especially for the research on the institutional factors which are affecting the behavior of the above participants. The author holds that financial security has a wide range of cause factors, which can be attributed to a result by the relevant participants'(including market micro-participants and government departments) behaviors affecting a country's financial security by some transmission mechanisms. Therefore, financial security should become the main common goal for different participants, and effective institutional arrangements for those behaviors will be good to build a long-term mechanism on protecting China's financial security. Compared with the traditional study of finance theory, theoretical research on financial security relatively late start, but the economic security thoughts of various schools as well as design and interpretation of many academic models of financial crisis had a very long history. The idea of financial security comes down in one continuous line with security, national security and economic security theory. Enlightened by mercantilism, trade protectionism, financial fragility theory, and the traditional theory of financial crisis, the author proposed a new financial security concept on the base of reviewing the foreign and domestic researches on financial security. Financial security is a systematic and dynamic macro-concept. Broadly speaking, financial security means a state in which a country has the ability of coordination between real economy and financial development, the ability of financial institutions'normal operation under the supervision and regulation by financial regulatory department and the government, as well as the capabilities of preventing, resolving and self-repairing when threatened by the inside and external impacts and ensuring our financial sovereignty's independent and integrality. To grasp the concept of financial security, we should clarify the meaning among financial sovereignty, financial risk, financial crisis, and financial stability. At the same time, intrinsic links between financial security and market economy also should be emphasized. To determine the state of financial security depends on a comprehensive indicator system, author discussed quantitative methods of measuring the financial security posture and pointed out the plight of quantitative research on t China's financial security.Though there are a wide range of factors affecting the financial security, this paper meticulous study on the transmission mechanism from main participants, that is financial institutions, real economy departments and government, to China's financial security currently.First of all, financial institution is the internal factors affecting financial security. The risk of financial institutions has a direct impact on financial security and social stability in a country, so the outbreak of the risk will affect the confidence of the general public, and cause a serious financial crisis finally. At present, China's financial structure still has a significant feature of indirect financial oriented, and direct finance scale is relatively limited. Therefore, bank risk is the core of financial security problems, especially the risk of state-owned commercial banks. On the one hand, the competitiveness and control power of state-owned financial institutions are directly related to the country's financial security. State-owned banks possessed defective endogenous during their development with the internal laws and mandatory system of government, which constitute"time bomb"in China's financial security; on the other hand, as one part of state-owned economy, those banks has the function of providing public goods(financial security) in nature. Therefore, designing effective institutional arrangements for state-owned financial institutions to decrease the specific risks and enhance the economy efficiency ability and the ability to add self value is good for state-owned financial institutions to play the role of safeguarding the financial security.Secondly, stable and harmonious development of real economy is the microstructure for financial security. Between real economy and financial security, there are relationships as"positive interaction"in economic ascending and"vicious circle"in the recession. For the moment, the global economic crisis triggered by US sub-prime crisis has lead to the recession of the global economy, and then our real economy has been affected to varying degrees, such as the weakness in export performance, the withdrawal of foreign capital, the downturn of real estate and so on. Though the direct loss of our financial system by the crisis is not so much, the risks of banking system credit default, international capital flight and financial assets fluctuations caused by real economy decline threat to China's financial security directly. In addition to its own financial regulatory system defects and the risk inherent in financial system, any kind of risk will probably lead to the outbreak of financial crisis.Again, the government will drive the changes in the financial system from its own"bounded rationality"consideration. As the main body of market intervention, government achieves financial security by legal and economic means. On the one hand, taking into account the functions and legal status of financial institutions, financial supervision is essential to restricting rights and maintaining a fair rule of law; on the other hand, from the ranks of legal value view, the protection of the financial safety and stability needs supervision in accordance with law. Furthermore, macroeconomic policies are not only essential instruments of eliminating short-term economic fluctuations, but also the major contingency measures when managing fatal financial security problems. Formulating financial laws, implementing effective financial supervision, introducing coordinated macroeconomic policies timely are the main way when the government maintaining the financial security. Above institutional arrangements are outside controls of financial risks, however, they have reflected the inherent demands of a country's financial safety.Economic globalization has brought out not only the optimized allocation of the outcome when sharing resources at a global scale, but also the greater risks and challenges to country's financial security. In this paper, the author discussed the main factors affecting financial security under the impact of economic globalization seriatim, and then explored the international threat to China's financial security presently. First of all, large-scale international capital flows and the opening of capital may increase the financial risks and the impact of China's financial security at any time. This paper analyzed the transmission mechanism from different forms, different deadlines, and different directions of international capital flows to the financial security, and then estimated the risk in China's financial security caused by international capital flows. Secondly, the full liberalization of the financial sector will impact the competitiveness of national financial enormously. With the continually opening of money market, capital markets and the foreign exchange market, the free flow of capital will bring out many difficult issues for China's financial macro-control and financial supervision. So, sorting out the situation of financial security in different periods according to history logic from modern China till now and revealing the important financial safety risk in China's financial opening up are very important. Finally, with the promotion of financial innovation, the internationalization of financial services, strengthening financial supervision has become increasingly prominent. This paper discussed the theoretical motivation of financial international supervision unity, pointed out frequent international capital flows and the resulting cross-border transmission of financial risks to the country's financial security were more significant, which needed the strengthening and improvement of international co-regulation imminently.Developed countries such as the United States and Japan possess a relatively complete market economy and a more complete financial security management system, including financial security, legal system, financial safety nets and crisis management policies after a number of economic crises and financial turbulence. Comparison and evaluation of maintaining financial safety practice in developed countries, and then learn from the experiences and lessons have an important practical significance for China to build and improve the financial security institutional framework. International practice has proved that in order to protect the financial security and maintain a good financial order, it is necessary to continue to deepen financial reform, solve the institutional obstacles of financial security fundamentally, make financial security legislation, and give strong financial supervision in accordance with the law. The maintenance of financial security depends on appropriate financial deregulation (including the relaxation of interest rate controls, restrictions on the establishment of branch offices, limit the scope of financial services, etc.), promotion of competition, enhancement of market vitality, improvement of financial regulatory system, as well as strengthen of the financial regulatory standards in international cooperation and coordination.Safeguarding national financial security is a complicated systematic project, which depends on a sound internal control system of financial institutions and real economy department, a perfect system of industry self-regulation, government's effective regulation on financial and real institutions, the flexible and prudent macroeconomic economic policies, as well as these institutional arrangements'coordination under economic globalization. Therefore, it is necessary to deepen the reform of state-owned commercial banks, to speed up the establishment of a modern commercial banking system and the corresponding risk control mechanisms and incentive mechanism; to exert the advantages of non-state-owned financial institutions and actively advocate for its optimization of the financial markets structure;to learn from the financial security practice of developed countries and improve the financial legislation, especially incorporate financial regulation into the legal framework of; to emphasize the importance of international cooperation in financial supervision and effectively guard against the risk of all types international capital flows; to formulate financial security into our macro-economic policy goal and focus on the implementation of policy co-ordination. At present, in order to achieve steady economic development and the goals of financial security, we should steadily push forward the upgrading of the industrial structure and economic restructuring, improve our position in the international division of labor, and reduce dependence on foreign countries.