The process culminated in 2005 and 2006 with public listings in Hong Kong of China’s three largest banks. By that time, however, President Jiang and Prime Minister Zhu had already been out of office for two years and a key ally for reform, Vice Prime Minister Huang Ju, was terminally ill. With their departure went the willingness of the top leadership to endure the brutal volatility of market-oriented systems, and that, in turn, weakened the push for a floating currency, independent pricing of debt and other securities and international access to China’s capital markets. The appetite for turning financial institutions into real commercial operations disappeared also.
Reform was relegated to an expanding number of squabbling bureaucracies. China’s new senior leaders, having risen, unlike their predecessors, during years of strong growth, were concerned less with the threat posed by a stunted financial system than with widening income disparities and the possibility of social unrest. Their aims shifted to social goals, notably achieving a “harmonious society”. As a result, China’s financial reform stalled and the country has never truly opened itself up to the world. Foreign firms hold trivial amounts of domestic financial assets (under 2%), and play only a marginal role in any domestic sector.
There have been some advantages in this. Chinese banks were not, in the main, exposed to toxic Western debt and, perhaps more importantly, never adopted dangerous Western methods of hiding risks. But China’s own approach presents these problems in a different form.
To the extent that risk has been distributed, it is largely from state-controlled banks to other state entities in increasingly arcane ways. This distorts external perceptions of China’s solvency. State debt appears to be quite low by international standards (just under 20% of GDP) but when all government obligations are lumped together, the authors reckon it is actually 76%.
The bigger problem, though, is that the system trades almost entirely with itself. Critical information about liabilities and pricing is deliberately concealed or impossible to discern; there are no outside entities establishing prices by bidding in the market. That undermines efficient capital allocation and allows excesses to fester.