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2017 | Buch

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China’s Financial System

Growth and Inefficiency

verfasst von: Dominique De Rambures, Felipe Escobar Duenas

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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This book examines the volatile landscape of the Chinese economy and the barriers to its continuing development. The author argues that underlying inefficiencies in China’s financial system currently prevent the further growth of its institutions and inhibit reform of monetary and fiscal policy. Rambures shows that, despite efforts to avoid a “middle income trap”, such long-overdue structural reforms are still faced with strong resistance from both economic and political circles. Chapters discuss approaches in tackling the Chinese national debt, the recent stock exchange collapse and subsequent currency devaluation, declining trade surplus, the wariness of foreign investors and its negative impact on foreign exchange reserves, and the heavy burden of state-owned “zombie companies”. The discussion positions current economic events within the context of China’s transition from a foreign trade and investment-led economy to one that is propelled by domestic consumption, service industries and innovation. Crucially, Rambures also addresses financial trends with reference to pervasive long-term influencing factors such as an ageing population, increasing inequality, corruption, pollution and migration.

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Inhaltsverzeichnis

Frontmatter

1. Introduction

Abstract

Before addressing the strengths and weaknesses of its financial system, it is worth remembering that China experienced one of the fastest growth rates over a long period (an average of 10% a year over 30 years, 1978–2008). It was much higher than England during the Industrial Revolution (less than 1% a year over a century) [1]. Based on its economic and social achievements, the Chinese economy is by far the most effective. In 2015, China was outperformed only by India (7.5% as opposed to 6.9%), although India started far behind and from a much lower level. However, the Chinese growth model that triggered such a remarkable economic performance, thanks to a combination of market and State stimuli, might well be the cause of the steadily declining growth rate and the deteriorating growth model.

Dominique De Rambures, Felipe Escobar Duenas

2. China’s Decision Making System

Abstract

It may sound strange to begin a book about the Chinese financial system with a description of the decision making system, but in China, everything is “political”. Politics and economics are one and the same thing. There is no Chinese wall between the State and the market, as is customary in a market economy. The decision making system is not transparent, which makes it difficult for the markets to work properly. According to the Constitution, China is a centralized one-party system. The Chinese Communist Party (CCP) controls directly or indirectly everyone and everything. But if the Party is powerful, it is not limitless: it generates counter-balances from within the Party and the State apparatus. Central government action is limited by the sheer size of the country and the population: 1.3 billion people scattered over 6 million square miles. The Party-State has to cope with a multi-layered bureaucracy: provinces, county, districts, towns, villages. Some towns are so large that they form a single autonomous unit (Beijing, Shanghaî, Chongking). The Party secretary of a province is much more influential than a minister based in Beijing. In theory, the flow of instructions goes down while the flow of information goes up, but the Centre must come to terms with the passive resistance of local levels and inaccuracy of the information. The deadly famine of the Great Leap Forward in the 1960s was caused not only by Mao’s megalomania, but also by the flow of reports channelled from local officials to the top, each one outbidding the lower one throughout the upper level. Although 95% of the Chinese population belongs to the Han ethnic group, the Chinese do not understand each other and have to rely upon a common language, Mandarin. Local idiosyncrasies are very strong. Local dialects, regional patrons, family links are alternative sources of power. A Party official appointed in a remote area has to cope with local powers and local leaders whom he does not understand. In any case he expects to be moved to a new appointment within two or three years. The central government is also limited by the bureaucracy at both the central and local level. Any company manager must come to terms with the overwhelming network of 80 million civil servants and as many party members (even though some are both). Any private entrepreneur has to rely upon a wide network of “friends” (nanxin) to set up daily bureaucratic problems. Government offices are overlapping and often compete with each other. Party-State control is indeed much “cleverer”, much more flexible than it used to be. Market mechanisms are more widely understood. Officially the Planning Administration has been over since 1992, but the powerful NDRC (National Development and Reform Commission), which took its place, interferes in any economic decision. Last but not least, in a totalitarian government, the rule of law is by definition meaningless. The corpus of law and regulations is not designed to rule everyone including the State and the Party, but to protect the Party leadership. Legal interpretation is unpredictable and differs from one place to next.

Dominique De Rambures, Felipe Escobar Duenas

3. A Non-Independent Central Bank

Abstract

Today all the central banks of developed countries are independent from the government. The notion of central bank independence is based on economic and financial motives, but above all it is tightly linked to the democratic system: the checks and balances system of power. Like courts and the press, the central bank is a magistrate in its own field and as such it is expected to be free from the other power centres. As the court is in charge of law enforcement, so the central bank is in charge of price and financial stability. Price stability (i.e. the domestic value of money) being a public good, the central bank has a duty to act as a counter-power and make sure that monetary policy is implemented free of government interference. In China the mere idea of an independent centre of power from the Party-State is not compatible with the Chinese communist regime, nor with the multi-century history and political tradition of China: central power could be delegated but not decentralized. For centuries, due to the huge size of its territory and population, China has been centralized, broken down and reunited again and again. Centralization is a basic feature of Chinese politics. From this perspective, Mao was the last in a long line beginning with the first emperor, Shi Huang di, who united China in 220 BC through blood and violence. As opposed to Western empires, the Chinese Empire has never experienced any form of feudalism, i.e. a hereditary power handed over to a local baron over a given territory and population. By definition, local power is limited in time and may be cancelled at any time.

Dominique De Rambures, Felipe Escobar Duenas

4. Chinese Banks: Between Control and Profitability

Abstract

The banking and financial sector has been the last one to be dealt with in the agenda of reform policy and opening up. The financial system plays a critical role in the management of the economy, but the challenge is less economic than political. Banking reform raises a lot of political arguments among Party members, between reformists and conservatives, pro-marketers and pro-statists, between those supporting a further opening and those reluctant to lower the barriers. No doubt it was much easier to cope with the people’s communes and State owned companies rather than the financial markets which had to be designed and implemented from scratch.

Dominique De Rambures, Felipe Escobar Duenas

5. Sidelined Foreign Banks

Abstract

Within the framework of the policy of reform and opening up initiated in 1978 under Deng Xiao ping’s leadership, opening up was as important as reform. Actually, opening up was supposed to be an instrument of reform. From the very beginning of the reform policy, opening the Chinese banking sector to foreign banks was aimed at attracting foreign funds, transferring bank technology and expertise, and stimulating competition in sensitive banking and financial markets.

Dominique De Rambures, Felipe Escobar Duenas

6. Credit Black Market

Abstract

According to a central bank annual report (2015), non-bank lending accounts for 30% of the total bank credit in China. In the same report, there is a discrepancy between the growth of money supply and the growth of credit supply. Given that money creation is owed primarily to bank credit, there is a leak in the money supply. A number of companies and households that have no access to bank credit turn to the informal credit market. In this regard, the fast growth of non-bank lending is a sign of a financial system that is unsuitable for the needs of the economy. However, informal credit is not specific to China. In the UK, non-banking credit accounts for 3.5 times GDP and 8 times the volume of banking credit [1]. In China the high level of non-bank credit is both a sign of a highly sophisticated alternative source of lending and a remnant of old lending practices.

Dominique De Rambures, Felipe Escobar Duenas

7. Fast Growing Internet Banking and Finance

Abstract

In 2015, upon instruction from the State Council, the China Banking Regulatory Commission (CBRC), the banking supervision agency, granted six banking licences to non-banking institutions “on an experimental basis”. This initiative was aimed at spurring competition in the banking sector, promoting financial innovation and diversifying the range of banking products and services. With 600 million internet users who are already processing 50% of their shopping through online sale sites (against 20% in France and 33% in the UK), and 40% of global users of mobile banking through smartphones, China is already the world’s largest market. According to the World Bank, 55% of Asians, 64% of Chinese and 90% of Americans have a bank account. China has great growth potential.

Dominique De Rambures, Felipe Escobar Duenas

8. Government Controlled Financial Institutions

Abstract

The emergence of financial markets is the latest step in the on-going policy of reform and opening up. The development of a financial asset market was the key prerequisite for the proper running of the other production factors’ markets: the market for goods and services as well as the labour market. But it was also the apex of the struggle between “reformists” supporting the growing implementation of market mechanisms, and “conservatives” supporting the role of the State. Economic reform is a mix of ideological postures. In fact, this typically Western-minded dichotomy is meaningless in China: most of the high-ranking Chinese Communist Party (CCP) officials are both “reformists” in the economic field and “conservatives” in the political sphere. Above all, the Chinese leaders have a very pragmatic approach: what makes the economic system work best? What are the economic reforms compatible with the Party-State’s leadership?

Dominique De Rambures, Felipe Escobar Duenas

9. Under-developed Financial Markets

Abstract

In Western countries, government debt was the first security market. This is understandable in view of the fast-increasing burden of government military expenditure. Due to the lack of a debt market, governments were forced to give up and make peace when kings had exhausted their financial resources. In the seventeenth and the eighteenth centuries, shares of the “chartered companies”, such as Vereenigde Oostindindische Companie (1602), British East India Company (1600) and Compagnie Française des Indes Orientales (1664), were traded on the local market. In the nineteenth century huge government bond issues were traded on behalf of defeated countries (France 1871, China 1895 and Russia 1905). Shares of transport companies (railway, turnpike canals and the Suez Canal) were traded on the nascent market and later on in the century so were the shares of petroleum, mining and steel companies. Until the stock and bond market was opened to most of the largest industrial and trading companies China followed the same path, but China achieved within a couple of years what Western countries did over centuries.

Dominique De Rambures, Felipe Escobar Duenas

10. An International Non-Convertible Currency

Abstract

Foreign exchange policy is an inherent part of the policy of reform and opening up promoted by Deng Xiao ping: opening up the economy is the reform’s instrument. As the foreign exchange rate is set by the central bank, the Chinese government managed to neutralize foreign exchange policy and keep a tight control over fiscal and monetary policy. In addition, the growing volume of foreign exchange holdings was indispensable to overcome a difficult and dangerous transition period from a close planned economy to an open market economy. Now the government has undertaken a no less difficult and dangerous transition from a public investment-led economy to an economy driven by household consumption, the service industry and innovation.

Dominique De Rambures, Felipe Escobar Duenas

11. Conclusion

Abstract

When Deng Xiao ping said that one must “cross the river by feeling the stones” he did not mean that one must stop in the middle of the ford. That is exactly where the Chinese government is currently. Once again, interest rate liberalization is on the way, but the rate schedule has neither been cancelled nor withdrawn, only amended. This is in accordance with the traditional Chinese though that prioritizes the path (dao) over the final goal, learning by doing rather than doing by learning. Since China accounts for 23% of world GDP and has contributed to half of the world’s growth rate since 2008 (according to the World Bank), the Chinese economic transition is of primary importance to the rest of the world.

Dominique De Rambures, Felipe Escobar Duenas

Backmatter

Titel: China’s Financial System
verfasst von: Dominique De Rambures
Felipe Escobar Duenas
Copyright-Jahr: 2017
Verlag: Springer International Publishing
Electronic ISBN: 978-3-319-40451-6
Print ISBN: 978-3-319-40450-9
DOI: https://doi.org/10.1007/978-3-319-40451-6

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