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Currency Area East Asia: Cooperation or Confrontation? Read chapter Read first chapter

2014 | OriginalPaper | Chapter

China’s Financial System: Past Reforms, Future Ambitions and Current State

Author : Patrick Hess

Published in: Currency Cooperation in East Asia

Publisher: Springer International Publishing

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Abstract

Commensurate with its economic strength, China aims for a financial sector and currency of global importance. To assess the likelihood of this ambition in the light of the not fully convertible renminbi and sheltered financial system, this essay reviews past reform efforts and the current state of the Chinese form of capitalism. It finds that after a decade of bold financial reforms under Jiang Zemin and Zhu Rongji, the momentum began to wane from 2005 onwards. The new leadership under Xi Jinping and Li Keqiang needs to complete important reforms before China’s financial sector and currency can rise to international standards and importance. The new leaders seem to be aware of the historic nature of this task and are willing to close the gaps. In particular this includes introducing market pricing of capital and risk, increasing the breadth, deepness and liquidity of financial markets and improving the institutional framework for financial stability. If successful, these reforms are likely to sustain economic growth in the long term, boost currency cooperation in East Asia and speed up the emergence of a regional RMB bloc.

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previous chapter Currency Area East Asia: Cooperation or Confrontation?
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Footnotes
1
See the sub-title of Walter and Howie (2012) for the first, Yu (2012) for the second (“the PRC’s financial markets are in a messy state”, p. 23), and World Bank and DRC (2013, pp. 115–117) for the third label.
 
3
In his famous speech of March 2009, Governor Zhou Xiaochuan did not mention the USD a single time. But it is obvious that more than establishing the SDR (mentioned 25 times) as a serious alternative, Zhou’s aim was to criticize the dominance of the USD and to reduce the appreciation pressure on the RMB. See http://​www.​pbc.​gov.​cn/​publish/​english/​956/​2009/​2009122910442555​0619706/​2009122910442555​0619706_​.​html. Accessed 3 November 2013.
 
5
As witnessed by Deng’s statement during his Southern Tour in 1992 that “development is of overriding importance” (fazhan shi ying daoli). The poster carries this phrase on the ribbon underneath Deng.
 
6
This is in contrast with theories that economic development leads to Western-style democracy and the collapse of one-party systems (see for example Fukuyama 1989). So far, Chinese history proves those theses wrong, and Deng right.
 
7
The Mandate of Heaven (Tianming 天命) is an old Chinese philosophical concept concerning the legitimacy of the Emperor. It postulates that heaven would bless the authority of a just ruler, but would be displeased with a despotic or incompetent ruler and withdraw its mandate, leading to the overthrow of that ruler.
 
8
Its status as a central bank was legally confirmed in 1995 with the promulgation of the central bank law.
 
9
The former German chancellor Helmut Schmidt is full of praise for Zhu, for this and his other achievement of keeping the Asian Financial Crisis out of China. Of all top-ranking politicians, who Schmidt met, he attests Zhu the deepest insight into the economy of his country, and puts him with Lee Kuan Yew and Alan Greenspan in the highest category of economic policy-makers. See Schmidt and Sieren (2006, pp. 94–107).
 
10
At the head of the China Securities Regulatory Commission (see Sect. 3.2), Zhou earned the reputation of being a resolute, market-oriented reformer.
 
11
Zhu answered this to a Japanese reporter at the press conference after the National People’s Congress (NPC) in March 1999. See Zhu (2009, p. 17, translation by the author). When this book with transcripts of Zhu’s annual NPC press conferences and interviews given to media from around the world appeared in 2009, it soon became a bestseller in China.
 
12
Ibid, p. 59. A detailed assessment of the restructuring of the Big Four can be found in García-Herrero and Santabárbara (2013, pp. 151–155).
 
13
As shown by Lieberthal and Oksenberg (1988) in general (see pp. 35–41) and in Hess (2010) for Chinese market infrastructure policy (see pp. 21–27), leadership consensus and the support by the “preeminent leader” (such as Jiang, Hu and today Xi) are crucial pre-requisites for the success of policy-making in China.
 
14
See Walter and Howie (2012) and Li and Zeng (2007) for detailed discussions of China’s financial system.
 
15
For this reason, Walter and Howie (2012) call Chinese bonds “little more than disguised loans” (p. 158).
 
16
Chinese stock markets are also called “policy markets” as they move on the expectation of government policy changes rather than on news of company performance.
 
17
Walter and Howie (2012) call this group of SOEs in key industries the “National Team”, see pp. 182–213.
 
18
On 19 July 2013, the PBoC announced the elimination of controls on lending rates. However, the most important source of financial repression remains the ceiling on deposit rates, which is a key driver behind the rapid growth in shadow banking and the real estate boom as households search for higher real yields. Porter and Xu (2013) have shown empirically that the regulation of key retail interest rates influences the behavior of market-determined interbank rates, which may have limited their independence as price signals. They recommend further deposit rate liberalisation, which should allow short-term interbank rates to play a more effective role as the primary indirect monetary policy tool.
 
19
ECB estimate based on data by the PBoC, China Trustee Association, Deutsche Bank and JP Morgan Chase.
 
20
See Kevin Hamlin, “The New Man in Chinese Banking”, Institutional Investor—International Edition, Vol. 32, Issue 2, pp. 32–40, March 2007.
 
21
Micro-prudential banking supervision is exercised by the CBRC.
 
22
Cf. Chiang and Qing (2013).
 
23
Eichengreen (2013, p. 149). Yu (2012) reviews and refines other definitions of an international currency.
 
24
Eichengreen (2013) and Taylor (2013) have also noted that historically reserve currencies came from democracies with “checks and balances on the executive” or “economically and politically liberal societies with strong rule of law and property rights”. See Eichengreen (2013, p. 158) and Taylor (2013, p. 11). While this observation might be true ex post, it can not be postulated ex ante and does not seem to have any predictive power for the likelihood of the RMB to become an international currency.
 
25
See ECB (2013) for a detailed description of this development and its drivers, as well as challenges ahead.
 
26
Authorities have taken several measures and are particularly concerned about the link between shadow banking and regular banking activities and the inherent risks for financial stability. A joint notice by the MoF, NDRC, PBoC and CBRC of 24 December 2012 states that “local […] governments must fully recognise the importance and urgency of stopping illegal and irregular financial behaviour”. See MoF Notice No. 463 (in Chinese only): http://​yss.​mof.​gov.​cn/​zhengwuxinxi/​zhengceguizhang/​201212/​t20121231_​723354.​html.
 
27
Prasad and Ye (2013, p. 215). See also Prasad and Ye (2012), a detailed study of the prospects of the RMB.
 
28
Ma and Miao (2013) refer to the consensus in China to internationalise its currency, which in their view is driven by a mix of national pride, perceived economic benefits and external demand, as “a commitment device for pushing forward other financial reforms” (p. 191).
 
29
Cf. Zhongguo Renmin Yinhang (2012), published on the Chinese website of the PBoC and available under http://​www.​pbc.​gov.​cn/​publish/​goutongjiaoliu/​524/​2012/​2012091715583634​7504341/​2012091715583634​7504341.​html. Accessed 19 August 2013.
 
30
The People’s Bank of China (2013).
 
Literature
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Metadata
Title
China’s Financial System: Past Reforms, Future Ambitions and Current State
Author
Patrick Hess
Copyright Year
2014
Book
Currency Cooperation in East Asia

Print ISBN: 978-3-319-03061-6

Electronic ISBN: 978-3-319-03062-3

Copyright Year: 2014

DOI
https://doi.org/10.1007/978-3-319-03062-3_2