China’s continuing financial — and other — reforms

WSJ on China’s continuing financial reforms:

China’s cabinet is planning a closed-door, two-day meeting later this year to set a fresh agenda for the overhaul of its financial system, according to a government official with knowledge of the plans.

The meeting could yield changes for China’s most troubled banks and its policy toward rural lenders, and usher in new programs to breathe life into the securities and insurance industries, which have long been overshadowed by the banking system. China has held only two previous such meetings, both of which heralded major shifts in the country’s financial structure.

The meeting also could help create a deposit insurance agency, modeled after the U.S. Federal Deposit Insurance Corp., an idea that is being studied by China’s central bank and banking regulator. The institution would be intended to shore up depositor confidence as China weans its banks off government support.

Also possibly on the agenda is a restructuring of Agricultural Bank of China, one of China’s Big Four state banks, which accounts for more than half of China’s bad-debt burden on its books…

Past meetings of the group have led to significant policy shifts. After the first meeting, in November 1997, which was held in the midst of the Asian financial crisis, China’s government borrowed heavily to spur investment. It also led to a change in the structure of China’s central bank to mirror the U.S. Federal Reserve system. A second meeting, in February 2002, carved the China Banking Regulatory Commission out of the central bank and put the country’s state-owned banks on the path to listing shares overseas.

We expect serious reforms, because the underlying problems with China’s financial imbalances are themselves quite serious, and because China’s leadership knows that they are riding a tiger in their breakneck capitalist development. Stopping the beast would be deadly, but they are riding headlong into a risky and unknown future.

UPDATE

The following excerpts from Premier Wen Jiabao’s press conference the other day are instructive:

Our country and our nation now stand at a new historical turning point.

In terms of new tasks, we need to be even more sober-minded. We need to remain firmly on the right course, and we need to work even harder. By keeping an even more sober mind, I mean that we need to realize that the achievements we have scored so far are only the very first step in our modernization drive. The road ahead will be even longer and more arduous. We need to be cautious and prudent, especially when things are improving. To think about where danger looms will ensure our security; to think about why chaos occurs will ensure our peace; and to think about why a country falls will ensure our survival.

On staying firmer on the right course, I mean we need to consistently and unswervingly press ahead with reform and opening up. We need to continue to adhere to the road of building socialism with Chinese characteristics. Although there will be difficulties on our way ahead, we cannot stop. Retrogression or back-peddling offers no way out.

On working even harder, I mean we need to be prepared for all kinds of difficulties and risks. Some of them may be predictable, and others may not. Our nation has constantly improved itself and remained a vibrant nation. The reason for this is that we have a resilient, unyielding and industrious spirit. We must remain fully prepared for a long-term and hard struggle.

Specifically, he addressed a number of areas:

(a) agriculture and the thrust to “facilitate our efforts to build a moderately prosperous society in the countryside and modernize China’s agricultural sector;”

(b) Taiwan, “An old Chinese saying says that a just cause enjoys abundant support, while an unjust one finds little support. The leader of the Taiwan authorities tries to block the opening of the three direct links across the Taiwan Straits…We will never give up our efforts for peaceful reunification. At the same time, we will never waiver in our opposition to secessionist activities;”

(c) Hong Kong, “It has been nine years since Hong Kong’s return to the motherland. We can see that the capitalist system in Hong Kong remains unchanged. The laws and regulations in Hong Kong remain basically unchanged. The freedom and rights of people in Hong Kong are duly protected. Hong Kong, as it stands now, is the world’s freest and most open economy. Hong Kong is also the world’s shipping, financial and trade centre.”

(d) the achievements of reform, “Through China’s reform and development, we have successfully resolved the problem of feeding 1.3 billion people in the world, we have successfully lifted over 200 million people out of poverty. China’s development and stability itself constitutes a big contribution to the peace and prosperity of the world.”

(e) Japan, “the China-Japan relationship has run into many difficulties, which we did not hope to see. The reasons behind these difficulties have nothing to do with China or anything to do with the Japanese people. They have to do with the fact that the leader of Japan continues to visit the shrine where the class-A war criminals are honoured on various occasions. This has extremely offended the Chinese people and people in the rest of Asia. Pending a solution to this issue, the China-Japan relationship could hardly develop in a smooth manner.”

(f) Free speech and protest: Every citizen in this country has the freedom of speech and freedom of publishing. At the same time, every citizen in this country needs to abide by the laws and safeguard the national and social interests. China is now in a period of a rapid economic growth. At the same time this is also a period with a very high concentration of all kinds of acute problems. The reasons behind the salient problems are multi-faceted. A very important reason is that in some localities, there are authorities who breach the laws and regulations and violate the rights and interests of the general public. In this context we need to learn how to properly deal with the conflicts of interests and social problems in the new context….we also need to educate and properly guide the general public so that they can more and more realize that their legitimate concerns need to be expressed through legal channels and in lawful formats.

(g) Currency reform, “We have established a new RMB exchange rate regime and we will further build this system, strengthen the exchange rate system and we will expand the foreign exchange market and allow more flexibility and fluctuation of the Chinese currency. And we think, according to the current exchange rate regimes of Chinese currency based on market changes, there is room and the capacity for the RMB to fluctuate either upward or downward on its own.”

(h) Social order, “Our government is the government of the people. I myself am a son of the Chinese people. All the achievements we have scored are due to the efforts of the Chinese people. As for what touches me most, that would be the popular support for the government. Such support can be expressed in terms of encouragement or critical opinions from the general public. Such encouragement and critical opinions are always rendered with warmth and consistent support for the government. As for what saddens me most, I think for the past three years, I have not been able to find better solutions to the matters that most interest the general public. For example, inadequate and overly expensive medical services, education services, the housing problem, as well as the safety problem.”

We have no doubt the the government is acutely worried about social order and is fearful of losing control as growth continues at an uncontrollable — but necessary pace — for social stability. Indeed, the mealy-mouthed and false to answer (f) above, was a poor attempt to answer this question:

In the past three years we have found that more and more restrictive measures have been taken against the freedom of speech, and particularly the freedom of the speech on the Internet in this country. We have also noted that more violence has been used by the public security organs in dealing with the protesting farmers who have lost their land due to the land seizures. We’d like to know, do you think such a kind of approach or practice is appropriate? I’d also like to know that in the past few years there are quite of a number of major coal mine accidents in this country. Many people believe that the only way out in this context is to allow the workers in the country to organize their own trade unions instead of joining the trade unions that are set up by the companies where they work for. I’d like to know when the Chinese Government will allow the workers to establish independent trade unions?

No doubt Premier Wen wanted to put the reporter in jail just for the question; but that’s not really possible if you have to keep growing at 10% a year (or at least 7% a year) to keep both the new middle class and some significant portion of the dirt-poor 800 million farmers from rising up in revolt. We have no doubt that the old line Communists and the new de facto capitalist-Communists would each choose to react with total force to maintain order — but the kinds and amounts of force may have shifted because of the capitalist boom. Perhaps this is part of what Premier Wen meant when he said: “Although there will be difficulties on our way ahead, we cannot stop. Retrogression or back-peddling offers no way out.” His problem is this: the way forward may also offer “no way out” for a Communist ruling class.

2 Responses to “China’s continuing financial — and other — reforms”

  1. China Law Blog Says:

    Change is obviously necessary, but I question how much pain and possible discontent the government is willing to subject itself. I think very little. Japan needed to change too, but it chose to muddle through. I think China will do the same.

  2. spurwing plover Says:

    The eco-freaks want us to copy chinas one child policy becuase they have been listening to zero populationist freaks like PAUL EHRLICH and the freaks at WORLD WATCH

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