Imagine, you are a
farmer. One autumn, your apple harvest turns out much bigger than
expected. What to do about your apples, knowing that they will perish
soon? As you cannot pick them all by yourself on time, you might ask
your neighbors for help. Perhaps one could even bring his harvester
and pick the apples much faster than than you could do with your
hands...
Replace your apple farm
with Chinese financial markets and your apples with money and you
touch upon one of China's urgent economic problems.
The following is based on a series of speeches from Guo Shuqing, former Chairman of the China Securities Regulatory Commission, held between May 2012 and January 2013.
China has a high savings rate
Today, China has one of
the highest savings rates in the world. At the end of 2011, it stands
at 51 % which is twice as high as Germany's savings rate and four
times the US savings rate.
This means that China has
money. More politely, China's financial resources do not encounter
any problem of scarcity.
Capital allocation
in China is sub-optimal
However, despite the
abundance of funds, capital allocation doesn't work. As a matter of
fact, savers simply lack appropriate investment opportunities which
could re-inject the money in the real economy. In addition, capital
allocation among industrial sectors is unbalanced: Some sectors
(manufacturing, chemicals, mining, and infrastructure) are provided
with excess funds whereas other sectors (SMEs, agriculture,
education, health-care, and culture) lack sufficient financial
resources.
As Guo Shuqing says, this
China's financial service industry has become a “bottleneck
sector”.
China's financial
sector lacks innovation
What are the roots of
sub-optimal capital allocation? Guo Shuqing is not prude with his
fellow countrymen: “There is a crippling economic and financial
problem, which is incompetence.”
To
counter this incompetence, the former Chairman first trusts his
fellowmen: “Employees of investment banks are known to be
the smartest people and should be able to come up with smart
solutions.” As this is
obviously contradictory to the above statement about incompetence, he
also suggests to stick to innovation: “It is
unsustainable to always follow the footsteps of others. This is
exactly why we are calling for innovation-driven growth of the real
economy.”
Additional issues that
China’s financial sector faces include
- unreasonable valuation (namely P/E ratio) of equities;
- insufficient diversification of listed companies’ shareholders;
- lack of market integrity and legal awareness among market participants (for example insider trading and market manipulation);
- substantial volatility;
- over-dependence on indirect financing (80 %) as opposed to direct financing (20 %);
- slow development of Chinese bond markets (Stock markets are 4.5 times bigger.);
- underdeveloped derivatives market;
- abundance of financial resources for large and government-backed firms and lack of financing for small and middle-sized enterprises.
But what does innovation
actually mean for the Chinese financial industry? It means to
- focus on the needs of the real economy;
- introduce market-oriented reforms of interest and exchange rates to allow suitable pricing of financial products;
- decrease market entry regulation and, at the same time, increase business activity regulation once you have entered the market;
- open up Chinese financial sectors to the outside world to enhance efficient control of profitability by foreign competitors.
- encourage long-term investment through appropriate tax policies;
- deepen IPO and delisting reforms to curb speculation and allow a good interplay between primary and secondary markets;
- create incentives for listed companies to pay out dividends;
- strengthen law enforcement in securities markets.
Furthermore, Guo
Shuqing's speeches are filled with moral appeals:
“Always refrain from
offering products that are not well understood!”
“Never seek
unjustified profits!”
“Keep risk exposure
within a controllable range!”
“Always prepare for
worst and make counter-cyclical provisioning!”
“Face up your
responsibilities!”
“Keep a strong sense
of social responsibility and foster your sense of honesty,
compliance, patriotism, caring for the people, poverty relief and
environmental protection!”
To conclude, the China
Securities Regulatory Commission intends to develop Shanghai’s
position as a financial hub. In this context, Guo Shuqing praises the
high level of credibility that Shanghai offers:
“For example, taxis
in the city are well managed and they seldom take detours.”
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