Building a financial system that better serves the new manufacturing economy requires an open, fair, transparent and predictable market environment. Chinese experts Liu Mingkang and Li Wei consider the challenges.

3D printing

Manufacturing remains a vital force in driving economic growth and raising living standards. It has ushered in a new era with the adoption of artificial intelligence (AI), big data, cloud computing and the Internet of Things (IoT), and the use of 3D printing, advanced material and collaborative robotics in the production process to achieve the best business outcomes.

New manufacturing is fundamentally empowered by data. Data analytics can generate descriptive, inferential and predictive information to help companies make solid strategic decisions, perfect the business model, automate the production process, enhance operational efficiency and improve customer experience.

Given such industry trends, manufacturing has the potential to change at pace, but there are plenty of challenges holding it back. In both advanced and developing economies, manufacturing is under sustained pressure. While a low barrier to entry has already brought in lots of market players, the situation has been further exacerbated by reduced lead times, excess inventory and increasingly insatiable customer needs. Volatile resource prices, rising wages and operational costs continue to mean low profit margins. Furthermore, a looming shortage of skilled talent and heightened environmental regulations have also darkened the industry's outlook.

Moreover, with manufacturers going digital, the traditional view that manufacturing and services are separate sectors is becoming obsolete, given that service input makes up an increasing amount of manufacturing activity. But this combination could bring such complexity that we must be very careful moving ahead.

Financial services gaps

The successful transformation of manufacturing requires a supportive, innovative financial system. However, financial services still fall short of what is required to bolster an advanced manufacturing sector. Problems that caused financing needs in traditional manufacturing remain unaddressed. Worse, new challenges facing the evolving industry dynamics are not fully knowable.

Financing difficulties in manufacturing are not new. The industry has been beleaguered by obstacles ranging from low profit margins, overcapacity, high energy consumption and low efficiency. All this leaves the sector with higher default risk than others and means financial intermediaries and capital markets more likely to deploy their limited funding towards more profitable sectors, such as real estate, and more creditworthy customer groups like state-owned enterprises.

New industry standards that fit the evolving market are still lacking. For financial services to mesh with new manufacturing, standards are essential in a wide range of fields, from technology adoption, data management and product development to business operations and risk management. In many areas, standards have yet to be established, impeding interoperability across channels and platforms.

Data sharing, though essential, faces both barriers and risks. The value of data is realised only when it is freely flowing and shared. However, market players may be reluctant to change given the potential to undermine commercial interests, massive infrastructure investment and complex process restructuring. In addition, the risks associated with national security, personal privacy and product safety hazards have also slowed the pace of data sharing.

With the boundaries between financial services and manufacturing blurring, a new competitive landscape is likely to emerge, with new uncertainties. While fintech adoption allows financial services providers to access untapped opportunities in a full range of manufacturing activities, big data and IoT also leave manufacturers better positioned to discover and satisfy the unfulfilled financial needs of business partners and customers. As each side starts eating the other’s lunch, policy-makers will be struggling to redraw the boundary lines and deal with problems arising from digital transformation.

More worryingly, a study of the trends in global talent movement calls into question the manufacturing industry’s long-term prospects, because of its lack of employment attractiveness. According to the research, about four out of five of the world’s science and engineering graduates moved away from their fields to other non-manufacturing industries for career development, leading to deficiencies in the talent pool.

What can be done?

Overcoming the financing hurdles and building a financial system that better serves the new manufacturing requires an open, fair, transparent and predictable market environment. To achieve this, efforts must be taken to put in place laws, rules, standards and work mechanisms, and advanced digital technologies should be leveraged.

Financial institutions need to increase research and development investment in digital transformation, such as digital banking and digital insurance. By embedding IoT, AI and big data into the manufacturers’ production systems, as well as the upstream and downstream segments, financial institutions can better understand manufacturers’ daily operations and risk profiles. They could also benefit from adopting blockchain technology to reduce frictional costs and strengthen security in financial transactions.

All these efforts would help financial services providers achieve effective risk control, as well as improving the allocation of financial resources through exploring new ways of collateralised financing and bringing disruptive innovation to traditional financial services such as credit guarantees, supply chain finance, asset securitisation and debt-for-equity swaps.

For administrative and regulatory agencies, digital technology can be used to free up resources, improve regulatory effectiveness and provide better public services. For example, agencies can employ big data and process automation to optimise licensing approval procedures and off-site supervision for greater efficiency and effectiveness. In this regard, modernising existing information infrastructure and enhancing data quality is key.

Financial regulators have a major role to play in proactively delivering a broad scope of quality data and information in a digitally usable format for market participants. Government organisations should facilitate the free flow of data between financial institutions and manufacturers. Further regulations concerning financial data standards and IT infrastructure should be adopted to provide a solid foundation for industry innovation and development.

More could be done by the authorities to foster a market mechanism conducive to manufacturing. The treasury department could promote long-term capital formation and low-cost resolution of financial non-performing assets, which facilitates the flow of funds to new manufacturing firms. The tax administration can work out more reasonable policy arrangements for pension tax deferral, capital gains tax and income tax, to name just a few.

Regulators should also build a diversified financial system by developing a multi-layered capital market and pushing through related reforms, to increase the share of direct financing. They should also implement differentiated credit policies and risk monitoring indicators to increase longer term financing support for new manufacturing industries.

Openness to change

Advances could be made with the development of an open and innovative market environment. Financial authorities should further expand market access to all types of investors, eliminating rules that unintentionally limit the business scope of some financial institutions. An even playing field should be created for all businesses, whether large or small, domestic or foreign, state owned or privately owned. When testing new forms of financial services, a fair representation of the market should be considered.

While additional efforts are called for in strengthening policy clarity and predictability, regulators should remain open minded concerning innovation, despite some level of uncertainty, and set up a regulatory sandbox, allowing trial and error while keeping risks under control. For legal issues stemming from innovation, it is wise to respect the consensus of the contract parties and stakeholders to pick up the applicable laws and arbitration tribunals, and actively use foreign legal service providers if needed.

Moreover, financial institutions and manufacturers can also embrace openness through expanding data access and facilitating systems integration, business co-operation and personnel exchanges, which will remove information silos, reduce social costs and raise financing efficiency.

Crucially, there needs to be a pipeline of employees in place to continue these developments in the coming years. As the Chinese proverb goes, it takes a decade to grow a tree, but a century to grow a generation of talent. Preparing the appropriately skilled workforce for the future calls for significant changes to take place right now. In developing talent, reforms in education and vocational training are required to reflect the evolving socio-economic transformation. Flexible employment arrangements and favourable benefits should be extended to attract top talent both home and abroad. Finally, an environment tolerant of failures needs to be fostered to encourage innovation and entrepreneurship.

Liu Mingkang is the former chairman of the China Banking Regulatory Commission, and Li Wei is from the International Department of the China Banking and Insurance Regulatory Commission.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter