JUDGING by the size of its capital market, the number of financial professionals, or the keen public interest in financial products in a society with the world's highest household savings rate, China has joined the ranks of the few first-tier financial powers.

Flash back to the time of the country's entry into the World Trade Organization. Many in China then fretted about the possibility that opening the domestic market to "predatory" foreign investors would pose an existential threat to domestic firms.

But it turned out that China was well prepared for the formidable foreign challenge, and five years after it obtained WTO membership, it still exercised considerable caution in further opening its market and kept in place prerequisites for foreign capital inflows. These precautionary steps have enabled Chinese businesses to live in peace with foreign "predators."

After the 2008 financial crisis broke out, China has stepped up its efforts to elevate the yuan's international profile and turn Shanghai into a global financial center.

Nevertheless, the fact remains that the country is a "manufacturing titan" but a "financial dwarf." As such, the need for China to build on what it has and update its "software" is becoming increasingly significant.

However, a tightly restricted capital account and the continued lack of market-dictated interest rate and exchange rate policies have a negative impact on China's liquidity and risk diffusion. Moreover, the nation's immature financial oversight and the extent to which it is exercised are another reminder that it still lags far behind the world's major financial players.

Flaws

That China continues to rely on foreign investment to drive domestic growth despite its high savings rate speaks volumes about its flawed financial system, which fails to contribute the money needed for sustainable development.

That said, China's financial system has accumulated a comparative advantage over the past 30 years. Late leader Deng Xiaoping's reforms have created a mid- and high-income class. As demand rises for quality financial services, it necessitates financial innovation to absorb the liquidity and unleash it in the most lucrative sectors.

This development would assuage our concerns about the over-concentration of capital in property and stock markets. Besides, it would render redundant administrative curbs on runaway price hikes.

In the wake of the financial crisis, the excess liquidity sloshing in the global market has pushed up prices in a new round of inflation. Due to soaring operation costs, some private businesses have to exit from their respective industries and turn to finance for safety of their assets. Some firms engage in loansharking and speculation in real estate and commodities in anticipation of making quick profits on price differences.

In western China, lavish government expenditures have also fostered this bogus model of "financial business."

It will greatly countervail inflation and asset bubbles if we find ways to convert speculative capital into start-up funds to support wannabe entrepreneurs returning from abroad. For instance, Beijing may consider bestowing preferential policies like tax rebates or tax exemptions on non-profit venture investment projects. In this way it may keep Chinese money and experience at home, to be handed down to up-and-coming young businessmen, instead of losing them to overseas markets.

What's more, China will have to improve the environment in which private capital competes and enhance the investing efficiency of central and local governments before any talk of becoming a "financial titan." The usual and least risky path to financial prowess lies in the following procedures.

First, we ought to invent the proper mechanisms for price formation at home, followed by increased outlays in education and research and development. These moves are aimed at creating projects worth investing in for financial capital seeking hefty returns.

Second, we ought to press ahead with the market reform of exchange and interest rates, boost financial innovation and differentiation of financial services. Only on this basis can we deepen the openness of China's financial market and increase its liquidity, competitiveness and robustness.

After all these conditions are met, the idea of lifting the yuan's global status will sound realistic. Otherwise, hasty attempts at realizing this ambition might cost us what we have achieved over the past 30 years.

Fantasy

China's capital market remains partially closed, which insulated it from previous external shocks. This has fueled the fantasy that China can be a financial powerhouse in addition to a manufacturing one. This notion is misleading. The past experiences of Japan, South Korea and several emerging Southeast Asian economies have something to teach China in this regard.

On the one hand, they had wanted to maintain manufacturing clout by stabilizing their currencies' exchange rates; on the other, they liberalized their capital markets in hope of becoming financial hubs, only to be embroiled in disastrous meltdowns.

Their lessons suggest if we vigorously develop risky financial services at the expense of manufacturing, we will lay ourselves open to shrewd speculators who are good at harnessing risks and plundering our hard-won wealth in an openly legitimate way.

Although China's manufacturing stays at the bottom of global value chain while everyone is dreaming about a new financial colossus, the time hasn't come for the country to abandon manufacturing in reckless pursuit of the yuan becoming a global currency.

If the vacuum left by phased-out industries isn't filled by new capabilities fast enough, we can hardly survive the jungle laws governing global business competition.

In fact, each nation and company can find its place in the global division of labor, so it doesn't matter whether their positions in the hierarchy are high or not. It only matters that they know what their strength is - strength that nobody can imitate or challenge.

Therefore, the moment we start to weigh the benefits generated by finance and manufacturing, and decide which is more rewarding, we are poised to lose our superiority while remaining incapable of mastering others' strengths.

In conclusion, China ought to consolidate its footing in manufacturing before conditions are ripe for it to incrementally proceed with its financial gambit.

(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)