China's Financial Transition at a Crossroads

China's Financial Transition at a Crossroads

EDITED BY CHARLES W. CALOMIRIS
Copyright Date: 2007
Pages: 432
https://www.jstor.org/stable/10.7312/calo14192
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    China's Financial Transition at a Crossroads
    Book Description:

    China's increasing role in global economic affairs has placed the country at a crossroads: how many and what types of international capital-market transactions will China permit? How will China's financial system change internally? What kind of relationships will the Chinese government develop with foreign financial institutions, especially with those based in the United States? Can China broker a sustainable partnership with America that will avoid sending economic shock waves throughout the world?

    Drawing on the contemporary research of prominent international scholars, the experts in this volume outline the trajectory of China's financial markets since the advent of reform and anticipate their uncertain future. Chapter authors and commentators include Geert Bekaert, Loren Brandt, Lee Branstetter, Mary Wadsworth Darby, Michael DeStefano, Barry Eichengreen, Campbell Harvey, Fred Hu, Xiaobo Lu, Christian Lundblad, Ailsa Roell, Daniel Rosen, Shang-Jin Wei, Jialin Yu, and Xiaodong Zhu.

    The book begins with an overview of the history of financial-sector development, regulation, and performance and then focuses on the banking sector, discussing the progress, challenges, and prospects of current sector reform. Subsequent chapters describe the role of foreign capital in China's development and analyze the changes in capital flows and controls over time; explore various explanations for China's composition of foreign-capital and foreign-exchange policies, particularly the factors shaping China's reliance on foreign direct investment; and provide an international, comparative perspective on the remarkable growth experience of China and the contribution of its institutional environment to that experience.

    Contributors dispute the belief that stock market listing has done little to reform state-owned enterprises and take a hard look at the exchange rate regime choice for China, considering the potential long-run desirability of flexibility and the appropriate sequencing of reforms in foreign-exchange policy, domestic banking reform, and capital-market openness. The book concludes with a roundtable discussion in which prominent economists, including Peter Garber, Robert Hodrick, John Makin, David Malpass, Frederic Mishkin, and Eswar Prasad, debate the pace of the appreciation of China's currency and the likely consequences of that policy within and outside of China.

    eISBN: 978-0-231-51209-1
    Subjects: Business, History

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. List of Acronyms
    (pp. vii-viii)
  4. ACKNOWLEDGMENTS
    (pp. ix-xii)
  5. INTRODUCTION
    (pp. 1-22)
    Charles W. Calomiris

    In 2005, as part of a new set of initiatives designed to foster greater and deeper communication between academics and practitioners, the Jerome A. Chazen Institute of International Business at Columbia Business School decided to sponsor a major project exploring current prospects for financial policy reforms in China. The goals of this project were (1) to provide a treatment of the trajectory of financial reform at this time—its recent past, current status, and likely future; (2) to undertake both a deep and comprehensive effort by including detailed, empirical analysis of each major area of recent reform (domestic banking sector...

  6. CHAPTER 1 China’s Financial Markets: An Overview
    (pp. 23-78)
    Lee Branstetter

    This chapter provides an historical overview of the development of Chinese capital markets since the onset of the reform period. This important subject has attracted the attention of some of the best scholars working on China over the last 20 years. There is a vast literature for the reader to learn from and build upon. No attempt will be made here to be complete or comprehensive in covering even the major English-language contributions to this literature, much less the enormous volume of work published by mainland Chinese scholars in Chinese.

    Instead, the goal is to provide the reader with a...

  7. COMMENT:
    (pp. 79-85)
    Xiaobo Lü

    One of the major political economic events in the last half of the twentieth century was the rapid economic growth in China. With a growth rate averaging roughly 9 percent annually, it is hardly disputable that China’s economic growth has been the most remarkable world economic story in the last 20 years. However, reforms in the Chinese financial sector are far from a success. In fact, the financial sector has so lagged behind that some scholars suggest it is an “elephant mired in a swamp”—slowly moving ahead with great difficulty. Others call it the Achilles’ heel of the Chinese...

  8. CHAPTER 2 China’s Banking Sector and Economic Growth
    (pp. 86-136)
    Loren Brandt and Xiaodong Zhu

    Since 1994, China’s banking system has undergone significant changes and reform. This chapter provides an assessment of these reforms, paying particular attention to their implications for economic growth and to any potential risks now facing the banking sector. The analysis is grounded in a brief examination of the role of the banking and financial systems prior to 1994.

    At the risk of some simplification, four main conclusions emerge. First, prior to 1994, the Chinese government relied heavily on the financial system for redistributing income. Such a policy resulted in recurring inflation and instability in the growth process. A major success...

  9. COMMENT:
    (pp. 137-143)
    Michael DeStefano

    Brandt and Zhu’s discussion of China’s banking sector contains a wealth of interesting and hard-to-find data. The research indicates that at least episodically the Chinese banking system has contributed to economic growth and that by implication it is therefore capable of doing so again. Its proposition is that changes that are occurring in Chinese banking are real and meaningful and that while there is much continuity with the past what is happening currently is largely positive. This perspective differs from the widely held view that the system is characterized by gross mismanagement and poor lending decisions that have contributed to...

  10. CHAPTER 3 Understanding the Structure of Cross-Border Capital Flows: The Case of China
    (pp. 144-192)
    Eswar Prasad and Shang-Jin Wei

    The 2 percent revaluation of the Chinese exchange rate on July 21, 2005 has generated what appears to be a disproportionate amount of interest around the world. In many ways, this attention has to do with China’s massive buildup of foreign exchange reserves, its position as the world’s largest destination for foreign direct investment (FDI), and its status as the third largest trading nation.

    China’s integration into the global economy started from a very low base but has been progressing steadily. Capital inflows, in particular, were minimal in the 1970s and 1980s, impeded by capital controls and the reluctance of...

  11. COMMENT:
    (pp. 193-201)
    Daniel H. Rosen

    Prasad and Wei note that despite controlling the world’s largest foreign exchange reserves (over $800 billion), China has a relatively small net capital inflow. Strong inbound FDI is countered by the modest outflow of portfolio investment and repatriated profits that are allowed under current restrictions on the capital account. China is relatively abundant in labor and scarce in capital; as a result, FDI sees higher rates of return in China compared to other markets. At the same time, weak domestic financial institutions and tightly controlled interest rates limit China’s attractiveness for other forms of capital inflows, such as portfolio investment....

  12. CHAPTER 4 Financial Openness and the Chinese Growth Experience
    (pp. 202-280)
    Geert Bekaert, Campbell R. Harvey and Christian Lundblad

    If China’s current rate of growth continues, the size of its economy will exceed that of the United States in only 12 years. Even if this projection is overly optimistic, China’s growth track record has been remarkable, as can be seen in figure 4.1. Our chapter reflects on the Chinese growth experience from the perspective of an empirical multicountry model in the neoclassical tradition (see e.g., Barro 1997). That is, we link future growth to initial gross domestic product (GDP) per capita and a number of determinants of steady-state GDP, such as population growth, life expectancy, financial development, and the...

  13. COMMENT:
    (pp. 281-289)
    Mary Wadsworth Darby

    Bekaert, Harvey, and Lundbland use Barro-type cross-country empirical growth models¹ and build on standard regression techniques to address the question of what variables explain why China is growing so rapidly.² China’s real GDP growth over the past 25 years measures nearly 7.8 percent per annum, and consumption growth has averaged 7.0 percent, a performance apparently unmatched by any other developing or developed economy. During a recent visit to the United States, China’s premier, Hu Jintao, reportedly asked President Bush whether China should be seen as the new economic model for a developing economy. The chapter’s methodology is ideally suited to...

  14. CHAPTER 5 The Effects of Stock Market Listing on the Financial Performance of Chinese Firms
    (pp. 290-306)
    Fred Hu

    Although China launched market-oriented economic reforms in 1978, privatization of state-owned enterprises (SOEs) did not emerge as a key component of the reform program until the mid-1990s. In contrast to the rapid-fire sales via auctions or voucher distribution schemes that characterize the privatization programs in Poland, Russia, and other Eastern European countries in the early 1990s, the Chinese privatization, particularly for medium-to large-size SOEs, has been undertaken primarily through initial public offerings (IPOs) in the stock markets, in some cases supplemented by pre-IPO sales of stakes to strategic investors. Since these IPOs typically end up selling minority equity stakes—ranging...

  15. COMMENT:
    (pp. 307-313)
    Ailsa Röell

    The chapter takes a contrarian stance in extolling the benefits of corporatization and stock exchange listing. The received wisdom is much more pessimistic, as surveyed by Green and Liu (2005: 30): “[T]the evidence almost all suggests that the performance of listed firms is poor, and declines after restructuring and listing.” Many observers have pointed out that the ability to raise equity capital from unsophisticated investors on poorly regulated exchanges enables listed companies to waste or even divert money, and to manipulate investor sentiment so as to obtain the funds on unfairly advantageous terms. Most of the evidence concerns the impact...

  16. CHAPTER 6 China’s Exchange Rate Regime: The Long and Short of It
    (pp. 314-342)
    Barry Eichengreen

    China’s exchange rate system is a work in progress. The accelerating pace of change makes efforts to analyze it much like attempting to hit a moving target.

    In July 2005, following more than a year of intense discussion, the government announced that it was revaluing the renminbi (RMB) by 2.1 percent, switching from the dollar peg to a basket and allowing the currency to float more freely.¹

    In August, it expanded the forward market by allowing all banks, including foreign banks, with licenses to trade in the interbank foreign exchange market to transact RMB forward and swap contracts with clients...

  17. COMMENT:
    (pp. 343-349)
    Jialin Yu

    Barry Eichengreen offers an in-depth analysis of China’s exchange rate regime and policy suggestions. This chapter considers the choice of the appropriate exchange rate regime for China over various horizons, not the target exchange rate level for China at some particular horizon.¹ Eichengreen concludes that the yuan revaluation of 2.1 percent in July 2005 and the decision to move from pegging the yuan to the U.S. dollar to pegging it to a basket of currencies were broadly in the right direction, although he concludes that over a longer horizon greater exchange rate flexibility would be desirable. Eichengreen’s research estimates the...

  18. CHAPTER 7 China’s Foreign Exchange Policy: What Will China Do? What Should China Do?
    (pp. 350-378)
    Peter Garber, Robert J. Hodrick, John H. Makin, David Malpass, Frederic S. Mishkin and Eswar Prasad

    I will comment on China’s exchange rate policy: what it has been, what it is, what it ought to be, and what it will be. There is not much dispute these days about the “what it has been” and “what it is” parts, but plenty about the “what it will be” and “what it ought to be.” My colleagues, Michael Dooley and David Folkerts-Landau, and I¹ have been in the middle of this argument for three years now. We used to have to debate both academic and industry experts even about the “what it is.” But now our views are...

  19. APPENDIX I Regional Estimates of New Deposit and Loan Shares, and Nonperforming Loans
    (pp. 379-382)
    Loren Brandt and Xiaodong Zhu
  20. APPENDIX 2 Evolution of Capital Controls in China
    (pp. 383-404)
    Eswar Prasad and Shang-Jin Wei
  21. List of Contributors
    (pp. 405-412)
  22. INDEX
    (pp. 413-420)