2006, financial reforms in China have been stuck in a rut. But for a number of
reasons – most simply because Beijing now has little choice – we are now
convinced that financial reform is going to be a far bigger part of the China
story over the next three years.
basic reason for this belief is not the intentions of regulators but brute
Over the last 20 years, Chinese exports grew by 19 per
cent a year in dollar terms, and average export growth was 27 per cent in
growth rates depended principally on debt-turbocharged consumption growth in the
US, which will not return anytime soon. So over the next five years we are
likely to see exports growing far more slowly than at any point in recent
history — our guess is no more than 5 per cent on average in 2009-2012.
a result, China will lose a substantial chunk of the productivity growth that
has driven the economy over the past two decades.
the short term, Beijing has substituted for this lost productivity growth by a
vast monetary expansion. But to maintain GDP growth at the target rate of around
8 per cent beyond the end of next year, when the stimulus programme runs out,
Beijing will need to undertake domestic market reforms that will generate a
domestic source of productivity growth to replace what has been lost in
broad terms, two things can be done. One is to deregulate domestic service
industries, many of which remain state-owned sinks of inefficiency. The other is
to undertake large-scale financial sector reform, to improve capital allocation
and thereby increase the amount of economic growth produced by each investment
of recent months leave little doubt that China’s financial-sector supervisors,
who are in the main a liberal bunch, have spotted this opportunity and are
making a strong case for stepping up the pace of financial reform.
interesting in this context were comments two weeks ago by Fang Xinghai, the
Stanford-educated head of the Shanghai municipal government office charged with
executing the April 14 State Council decree to turn Shanghai into an
“international financial centre” by 2020.
is absolutely no prospect of Shanghai overtaking Hong Kong as China’s chief
international financial centre at any point in the next two or three decades.
But Mr Fang made clear that the central purpose of the Shanghai IFC policy is
internationalisation, he said, “can serve as a powerful lever to modernise
China’s financial system”. And why is this necessary? “China’s financial system
is good at financing the growth of SOEs and controlling systemic risk,” he said.
“But it is not so good at allocating capital efficiently. This works fine so
long as Chinese exports grow at 20 per cent a year. But this is gone
other words, it seems clear that Mr Fang sees the Shanghai IFC policy as
analogous to China’s entry into the World Trade Organisation eight years ago,
which was used by reformers to engineer a host of domestic market reforms that
would otherwise have been politically impossible.
the guise of creating a mainland financial centre to rival and eventually
supplant Hong Kong, reformers will have an opportunity to create better
functioning domestic capital markets and a far more diversified set of
specialised financial institutions.
expansion of China’s puny capital markets is already underway (see Dragonbeat’s
previous blog post on this subject: “A
moribund Chinese bond market springs to life”). Other imminent financial
market reforms include:
the establishment of dedicated small– and medium-sized enterprise (SME) lending
units in major banks;
the establishment of the long-awaited Growth Enterprise Board (GEB) on the
Shenzhen Stock Exchange;
the licencing of dedicated consumer finance companies, for which the China
Banking Regulatory Commission has already issued draft rules;
and experiments in the mortgaging of agricultural land - the first pilot
programmes were launched in February. (Read our previous blog post on this
land-rights reform is vital but not enough”.)
can be no doubt that the pace of financial sector reform is quickening, and will
likely accelerate further in the coming year or two.