China's financial sector must develop a stronger sense of urgency, accelerate its transition toward greater market orientation, digital and intelligent transformation, and internationalization, and enhance its competitiveness. It needs to allocate vast pools of capital more effectively, seize opportunities arising from the rapid emergence of technology-driven enterprises, deliver solid returns to capital providers and create broader room for its own development.

During the 15th Five-Year Plan period (2026-30), the financial sector will face both challenges and opportunities. The main challenges stem from the already large scale of financial assets, narrowing interest margins at some financial institutions and the diminishing sustainability of traditional profit models.

At the same time, significant opportunities lie in the broad prospects of tech-innovation finance, which open up new space for the transformation and upgrading of financial institutions. Only by continuously advancing market-oriented reforms, digital and intelligent transformation, and international development can financial institutions effectively respond to current challenges and seize strategic opportunities.

At present, China's total financial assets are already substantial, and production capacity in most sectors is also large. Compared with the sheer volume of capital, investment opportunities are relatively limited. Against this backdrop, it has become an inevitable trend for capital to seek higher-return investment destinations overseas. Such a shift helps curb the continued decline in domestic investment yields and stabilize return on capital.

Looking ahead, China will not only remain a major destination for capital inflows, but will also inevitably become a major exporter of capital. It can be expected that during the 15th Five-Year Plan period, China's outbound investment will exceed foreign capital inflows, resulting in net capital outflows. Returns from overseas investments will become an important component of China's economic growth.

From a practical perspective, exports are currently under considerable pressure, while many countries and regions welcome Chinese investment. China's industries and technologies are also highly competitive, making it possible to pursue a coordinated "going global" strategy that integrates industrial expansion with overseas investment.

After years of accumulation, China has built a solid foundation in technological innovation. During the 15th Five-Year Plan period, industry and technology are expected to enter a phase of concentrated breakthroughs. As a result, the emergence of large numbers of new technologies during this period is a certainty. Only with the vigorous growth of tech-driven enterprises will innovation-focused finance have viable investment targets.

However, these opportunities will not automatically flow to traditional financial institutions. In recent years, both in China and in the United States, activities in traditional venture capital and private equity have declined. The underlying reason is that today's investment landscape requires far more complex capabilities, including the use of massive datasets and extensive analysis and computation powered by artificial intelligence to assess the probability of investment success — capabilities that do not fully align with those traditionally possessed by financial institutions engaged in tech-innovation investments.

At present, a large amount of corporate venture capital is entering the market and has become a major force in venture investment. In China, those at the forefront of investment are often companies such as Alibaba, Ant Group and Tencent. In other words, CVC firms are actively investing in startups, rather than investment activities being led by the financial sector in the traditional sense. Today, even if the banking sector can mobilize hundreds of billions of yuan for equity investment to support technological innovation, it remains extremely difficult to accurately identify high-quality targets from among a large number of projects.

CVC firms typically deploy capital in areas closely aligned with their own development strategies in order to support research and development. Many cutting-edge R&D efforts are currently driven by industry itself. For example, in areas such as large-scale AI models, the most critical research is no longer confined to traditional universities or research institutes, but is increasingly advanced by enterprises.

More and more companies possess capital, algorithms, computing power, AI models and the ability to attract large pools of talent, enabling them to conduct R&D more quickly and efficiently. As a result, they are often more confident when investing in their own most advanced technological directions.

CVC firms also play the role of strategic investors and long-term patient capital. Their investment objectives are usually centered on strengthening a company's tech innovation capabilities and building out a complete value chain. Of course, achieving profits through eventual exits is also desirable. From this perspective, CVC firms truly embody patient capital with a strategic, long-term vision.

In China, government VC is also entering the market. It competes with traditional financial institutions by rushing into startup projects, but this gives rise to key questions: with the government already having invested heavily in industrial funds, how can projects be accurately selected? Have longstanding challenges in project screening been resolved? These issues remain to be suitably addressed.

Beyond these emerging investment forces, tech-innovation enterprises also have access to solid global financing channels. Against the backdrop of complex China-US relations last year, around one-quarter of companies listed on China's STAR Market still chose to go public in the US, indicating that overseas investors remain fundamentally optimistic about the development prospects of China's tech sector.

In summary, domestic industrial innovation will continue to surge, and high-quality projects still enjoy diversified and well-functioning financing channels. They can obtain funding from traditional financial institutions, seek support from the investment arms of large platform companies, or raise capital in overseas markets.

Good projects do not lack sources of funding, which is undoubtedly positive for the tech-innovation sector. However, for the traditional financial sector, this represents a significant challenge, particularly for China's domestic capital markets and tech-innovation finance system.

To address the above challenges, China should accelerate market-oriented reform, digital and intelligent transformation, and internationalization in order to expand its development space.

First involves market orientation.

The core of market-oriented reform lies in continuously improving the efficiency of financial resource allocation and ensuring systemic safety. Ultimately, a healthy market is one that is attractive — allowing participants to earn reasonable returns while operating in a secure and reliable environment. Achieving this goal can, to a large extent, be supported and safeguarded by digital technologies.

Second involves digital and intelligent transformation.

China's financial sector has achieved a high level of overall development in digital and intelligent transformation.

Today, we have entered the era of AI. Generative AI is profoundly reshaping the landscape of financial services, and we must strive to become strong players in the AI era. In the past, only a small number of large banks in China were able to develop large models with limited practical applications. Since the emergence of open-source models such as DeepSeek, banks of all sizes are now able to leverage these models — an encouraging development. At present, there are many opportunities to be harnessed, particularly in empowering financial services with AI technologies.

Third involves internationalization.

At present, capital is relatively abundant in China, while many developing countries remain capital-scarce. In addition to capital, China also possesses strong industrial and technological competitiveness.

China's industrial "going global" strategy has viable commercial models. As domestic financial services follow industries overseas, opportunities to generate returns abroad are quite clear. Therefore, the internationalization of the financial sector is indeed an urgent, necessary and highly promising path for development.

The writer is a professor at the University of Chinese Academy of Social Sciences, chairperson of the National Data Expert Committee, and former deputy secretary-general of the State Council.

The views do not necessarily reflect those of China Daily.