China: keeping pace with the times

Citation

Gentle, C. (2005), "China: keeping pace with the times", Journal of Risk Finance, Vol. 6 No. 1. https://doi.org/10.1108/jrf.2005.29406aaf.001

China: keeping pace with the times

The rise of China as an economic superpower now appears to have gained unstoppable momentum. It now consumes vast proportions of many of the world’s raw materials. It dominates the production of consumer durables. The future success of this economic miracle hinges on its financial system. Reforms to this system will be pivotal to the economic and financial success of China, the health of the international economy and the balance sheet of major financial institutions.

Jiang Zemin emphasized the importance of “keeping pace with the times”. For Deng Xiaoping, “seeking truth from facts” was essential. Today China is on the cusp of becoming a world economic super power. To fulfil its destiny, China must continue to introduce significant changes in the governance of business – although it should be noted that many of the critical issues are already being seriously discussed and addressed by the Chinese government.

Reforming the financial sector is perhaps the most important initiative so that China’s current accelerated growth can continue in an orderly fashion. Indeed, a more robust financial infrastructure will help to ensure both sustainable economic growth and social progress. The government has already proposed measures to improve corporate governance and address the cost and priorities for enhancing a financial system appropriate for the potentially largest economy of the twenty-first century.

It is important to acknowledge that the financial and governance arrangements that ultimately emerge in China will surely be unique. After all, the legacy of China’s social, economic, and political systems is embedded in a history that has seen several waves of sweeping change since the People’s Republic was founded in 1949. In contrast to many national financial systems, which typically evolved through a series of economic crises, China has the rare opportunity to build a robust and flexible financial system in good times and thereby limit the cycles of boom and bust.

Much ink has been split on the what the key issues that China faces, but it is critical that debate is now moved on to focus on some of the practical elements of forging a new financial system in China and of building on the current foundations developed by the government. What is required is a balanced set of initiatives detailing the high-level blueprints for the new financial architecture based on the requisite regulatory authorities and financial institutions. Here are four issues that need to be addressed:

1. 1.

   Foundations of success. Investing in a robust and flexible financial system is a top priority for China’s government as it works to ensure sustainable long-term economic growth. China’s financial architecture needs to reflect both its “one-of-a-kind” economic and social circumstances as well as global best practices. Whatever shape the final system takes, it is in the best interests of China that it be built on two widely-accepted fundamentals: accurate, accessible, and objective information; and the upholding of property and shareholders rights. The cost of building a new governance and financial architecture is likely to be significant.

2. 2.

   A price worth paying? Upgrading corporate risk-management and governance systems within China’s major financial institutions could cost in excess of US$1.2 billion (RMB9.84 billion) over the next three to five years. Investment is also needed to enhance the capabilities of China’s financial regulators, especially in terms of attracting and retaining top talent. The creation of an International Financial Advisors group for by both the banking and securities regulator is a significant step in the right direction.

3. 3.

   Addressing a central challenge. Forging a successful financial infrastructure in China hinges on reforming the banking sector – a most important and challenging link in the current system. Moreover, reforming the banking sector will enable China to properly prepare for the opening of its banking markets by the end of 2006 in accordance with the WTO timetable. Two areas for immediate action are: first, a clearer and more stringent corporate governance practices for the “big four” banks[1] are required as a prerequisite to their transformation into joint-stock companies. As part of this shift, a new body could be created to represent the state as a shareholder. Second, the Chinese government should consider adopting an explicit deposit insurance system and necessary controls.

4. 4.

   The road ahead. To ensure that the government will achieve rapid and robust progress, enhancing China’s financial system in a way that will foster greater transparency, build international investor confidence, and reduce the likelihood of conflicts of interest. Forging a new system should be built around five priorities:

5. 5.
   • •

     reforming corporate governance;

   • •

     enhancing regulatory authorities and supervisory practices;

   • •

     establishing an entity to represent the state as shareholder in state-owned commercial banks;

   • •

     creating a deposit insurance system and authority; and

   • •

     upgrading the compliance, corporate governance, and risk management systems within Chinese financial institutions.

Without these reforms it will be difficult for China to fulfil its potential as an economic superpower. The forces at work are truly staggering. The message for finance professionals everywhere in terms of opportunities and risks has to be: keep pace with the times in China.

NoteChina’s four biggest banks are: Industrial and Commercial Bank, Bank of China, China Construction Bank, Agricultural Bank.

Chris GentleDirector at Deloitte. He can be contact at cgentle@deloitte.co.uk