Connect with us

East Asia

The current financial regulation in China

Giancarlo Elia Valori

Published

on

The power of a newly established Chinese public organization, namely the Financial Stability and Development Committee, is growing. Said organization was created precisely on November 8, 2017.

It is an important organization under the State Council’s direct control. Indeed, it is an office of the Council itself which will deal mainly with China’s financial stability and with all matters concerning economic development and monetary and capital stability.

More specifically, the Committee will be tasked with deliberating major national programs for regulating the financial system, for organizing monetary policy with the Central Bank and for defining tax policies and the related fiscal and industrial actions.

This Committee will also be responsible for analysing  international and domestic financial situations, identifying the greatest global financial systemic risks, as well as studying the related conditions and finally defining the ways for reaching  financial stability.

The important choice made in relation to this Committee is that it will be chaired by the Chinese Vice Premier, Ma Kai.

The idea of ​​creating this organization had been suggested directly by President Xi Jinping during the National Financial Work Conference held on July 14-15, 2017.

The Committee will also strengthen the macro-systemic policies of China’s Central Bank. In fact, it is a matter of regulating and stabilizing the Chinese financial market, which is worth 40trillion US dollars and is one of the largest in the world.

The Chairman of the Committee and Vice Premier, Ma Kai,was born in Jinshan, a district of Shanghai, in 1946.

In the mid-1990s he was elected Vice-President of the National Planning Commission.

He was Deputy-Head of the State Council from 1998 to 2003 and also Minister for National Development from 2003 to 2008. He was appointed President of the National School of Administration and later Head of the Office for the development of small and medium-sized enterprises.

In fact, the Committee will also be tasked with coordinating tax and financial policies and tuning them with the long time schedules of the industrial system, while the collaboration between the Committee and the People’s Bank of China will allow the regulation of the 15 trillions currently invested in financial products throughout China.

With the creation of this Committee, high-risk investment or massive bank loans to buy securities will no longer be allowed, while it will be mandatory to set 10% of managers’ profits aside.

China is currently turning its old role as “world factory” into that of a modern consumer-driven economy.

Hence the need to regulate corporate and retail finance.

There are three issues underlying the new Chinese financial regulation: a) booming loans, the majority of which are requested by businesses and local governments; b) complexity, considering that risky creditors have moved away from banks, due to the complexity of rules, towards less structured products, while Chinese banks currently offer mainly financial products for the long-term management of household and business savings.

The third issue is c) guarantees. With a view to preserving their reputation, Chinese banks often offer even compensation to their clients who have lost money as a result of certain investment,  which leads them to miscalculate their risk share.

Hence an extremely fragmented banking system which is hard to control.

The Chinese systemic risk must be kept well under control:  financial assets have grown four foldover the last decade, from 310% up to 510% of the GDP, which, however, has grown by 2.5 times over the same period.

The expansion of credit has been led by the public sector and by its very poor regulation, with the expansion of shadow banks, non-orthodox credit and particularly risky – but attractive – financial products for private investors.

Credit growth has already declined, while corporate access to capital has also decreased considerably.

For the Party, however, the fragility of the financial system arises from the excess of leverage and debt investment and from the excessive debt in many sectors of the real economy, while credit has expanded too rapidly in the financial sector.

In late 2016 the average national leverage amounted to 247%,   while companies’ leverage was 165% in the same period.

Definitely too much debt for companies and individuals, far beyond the international standard.

As President Xi Jinping has pointed out, the control of aggregate money supply has been severely lacking.

President Xi Jinping has also noted that the financial institutions’ general control has been missing and the State has focused only on the individual links of the chain of financial audits.

President Xi Jinping has also maintained that the State has been unable to control major financial companies.

Moreover, the Chinese government’s interest in financial matters has never been negligible.

The National Financial Work Conference had been created as early as 1997.

Later, based on the analysis of that select group, the first Chinese sovereign fund, namely China Investment Corporation, was created in 2007.

A structure that can currently boast to have capital to the tune of 813.5 billion US dollars.

The fifth National Financial Work Conference was held in July 2017, simultaneously with the creation of the Committee.

As the CPC noted, all this was designed to reach “national financial security”, mainly with a view to backing the aims of the  13th Five-Year Plan.

President Xi Jinping also thinks that the new Committee shall a) deal with the real economy and b) combine and harmonize social development with economic development.

According to President Xi Jinping, finance is never disconnected from the social context in which it operates; c) financial regulation is always aimed at eliminating the systemic risk and d) reaching national financial stability.

Stability first and then development – this is President Xi Jinping’s belief.

Furthermore, local governments shall follow the central government’s rules. Any failure to report the financial risk will be regarded as an administrative irregularity.

This will be very useful, considering the ongoing trade war between the United States and China.

In fact, China has resorted to the WTO dispute settlement mechanism against the duties levied by President Trump.

It is worth recalling that the United States has levied duties equal to 25% on imported Chinese goods, for a total value of 50 billion US dollars.

So far these duties have been levied only in the aluminium and steel sectors.

China has responded immediately by levying equal duties on US products such as soy, pork and vegetables.

The immediate US countermove has been the doubling of duties on aluminium and steel up to 100 billion dollars.

One of the reasons for the current clash is certainly the forthcoming mid-term elections for which President Trump wants to keep on winning the support of the Rust Belt protectionist voters who enabled him to rise to the White House.

Moreover, according to the universal supply chain system, many of the Chinese products taxed by the United States come from South Korea, Taiwan and even from the European Union.

Hence the Chinese pressure could harm US farmers and the whole US middle class, as well as some of US best allies.

Therefore, while China’s recourse to the WTO has not slowed  down the aggressive posture of the Chinese economy towards the United States and the European Union, the aim of the current duties is to force China to revalue its currency, so as to rebalance the deficit between China and the United States, with the latter already recording a trade deficit with China to the tune of over 375 billion dollars.

Reading between the lines, President Trump wants a decrease of Chinese duties on US cars, so that there is an increase in China’s purchase of US semiconductors and, in any case, a greater share of the huge Chinese market for US companies.

Furthermore, China undermines intellectual property in the advanced sectors of computer science and Artificial Intelligence.

Finally, for the United States, the issue lies in hitting Chinese innovation and the “Made in China 2025” project, which is supposed to ensure China’s global strategic superiority in cutting-edge products, robotics and advanced infrastructure.

If everything goes well, at the end of this trade war, China will impose on the United States a network of joint ventures and selective openings for US products on the Chinese market.

That is what the new Chinese financial authority is for: to raise capital for the State’s primary projects and to protect China’s finance from the turmoil that could be caused by the monetary and economic imbalances resulting from the entry of foreign liquidity into the Chinese market.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

Continue Reading
Comments

East Asia

The West, Sinophobia and Cooperation

Irfan Khan

Published

on

Interestingly, populace they are inhabitant of whether West or East pole share having almost common issues like weak productivity growth, proliferation of sophisticated war weapons and climate dangers; however, except for a few issues which, in particular, people of West considers most panic and hazardous. Policy-makers of the West are indulging themselves with a narrative that China’s rise would threaten capitalist economic model and the very survival of the West liberal democracy. Is it so?

Not at all. What must be ponder here is the fact that international capitalists model has stopped functioning, which have witnessed 2008 financial crisis. The leading investors and tycoons, unfortunately, have not been maintaining a steady balance between profitability and investments: profits are becoming increasing while no apparent increase in investments has been recording. Its consequential effects are lowering trends in productivity across the globe; which, in response, has been adversely affecting the prosperity of people across the globe. Establishment and corporate-based politics put the nations in a competition with each-other, that affect masses; as it is underpinned by observing myriad portion of budgets are going into military weapons.

British colonial hegemony culture, and US-led conflicts since last few decades, morphed world into most devastating state, perhaps. In this scenario, China’s rise seeds a hope to the indigent and penurious economies, which the West is fury of.

The current dispute between the US and China in terms of trade and technology, and if European take side, would morphed to a more dramatic state; where the health of the global economy will likely to be damaged. It is safe to say and notwithstanding predictable that this  trade would be converted to a new hottest-cold war, which may force the emerging multipolar world to split into financial bipolar form.

How long will this bubble not burst? It will be likely to head the world towards a global conflict.

However, here’s one good news or perhaps token. West-Policy makers, instead of spreading Sinophobia, should assure that they can be living comfortably with China. It is because, so far so good, China has been depicting a cooperation and advancement, irrespective of humanity, ethnicity and religion. What’s more the West propaganda that China is appearing as geopolitical actor is equivocal; because it never influences and impose their culture on any nation.

Embracing a different economic model, China, is plausibly on a runner-up position to the US and experts claimed it will surpass the USin the next decade. Whether it’s 5G tech. Or leading status of green energy, or ultra-scales exports or its leading developments for the nations having indigent economies are hallmark achievements in recent history. The US and the West should, I propose, consider China’s rise a piece of cake, and welcome its come out while securing its interests under the umbrella of cooperation. This logic, while posing no threat, seems to be long term functional.

Continue Reading

East Asia

Beyond China-U.S. trade and where is its outlet?

Wang Li

Published

on

By

Since China-U.S. trade war started in the Mid-2018, it has lasted for more than 14 months. From the beginning, the World Bank and the IMF have taken the position that the trade conflict America has trigged will serve no country’s economic progress and their action is patently wrong. Since then, China has at several occasions showed its good-will and sincerity including purchase of the products from the U.S. and the consensus reached between the two heads of state at the summits in Argentina and Japan, during which both parties agreed to move towards dropping all of the additional tariffs introduced during the dispute, and reach a comprehensive agreement that is fair and beneficial to the two sides. Yet, there is still no insurance of the end of trade war between the two largest economies of the world.

Now comes a new possibility that from October 10-11, a senior trade delegation from China, headed by Vice Premier Liu He, is scheduled to meet their American counterparts in Washington DC, led by U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin. Yet, the trade talks also come at a precarious time in Trump’s decision to reduce the number of U.S. forces in the Syrian border areas with Turkey and amid a spiraling impeachment inquiry into his interactions with Ukraine. More than that, the White House has repeatedly used national security as a reason to sanction Chinese companies, and this has been a talking point in U.S. presidential campaign speeches.

As a matter of fact, the Sino-American rivalry, like the German-Britain rivalry one century ago, is as much a clash of two major powers as it is of two systems: the authoritarian and state-protected development of a rising power vs. the liberal, free-market constitutionalism of a ruling power. Therefore, differences in economic system inevitably amplified the salience of the narrowing economic gap, leading the ruling power to feel cheated and the rising power to feel unsatisfied and threatened. By taking the current China-U.S. trade war into consideration, several factors are complicating the upcoming round of talks.

First, the American resentments against the Chinese economy have grown and seemed to be systematic steps to decouple the world’s two largest economies. As American scholar James Rae argued that with a series of steps, ranging from the tariff rollout to restrictions on dealings with major Chinese technology firms and “ordering” American companies to move production out of China, the U.S. has signaled that this is a trade war, indeed a confrontation over the fundamentals of two rival economic models involving at least four economic tools—standard-setting, technology acquisition, financial power, and infrastructure investment.

Second, the U.S. argues that the Chinese story historically resembles the German one in an overall sense and these parallels are not entirely coincidental. China has long admired the German export-led growth model and is skeptical of laissez faire capitalism. The founding statesman of unified Germany has been consistently seen as an icon of a modernized and powerful country since China has taken its own modernization in the later 19th century. Even it is held, though groundless, that after China emerged from the civil turbulence in 1979, it supposedly structured its development banks on the German model, though it supplemented their loans with Western capital. Under state-directed development, China eventually emerged as the world’s largest exporter with enormous market share in the United States, similarly creating economic interdependence while inadvertently laying the foundation for political competition. This is one of the sources of the Thucydides trap” occurred in the United States but rejected by China and in particular President Xi Jin-ping.

In addition, as a result of these strategies, the speed of the catchup is equally alarming to American elites now. For instance, China’s GDP was only 25% of U.S. GDP in 1990 after a decade of reforms, but has since approached American GDP in 2018. On the one hand, China, like previous Germany, is perceived to have undergone a radical and alarming economic modernization that catapulted it into the rank of first-rate power in mere decades. On the other hand, the United States, following the British mentality of the day, holds that the Chinese developmental model is a form of cheating, forced technology transfer and manipulation in finance. In light of this, China has paten reasons to be concerned that the United States has sought to halt its peaceful rise and undermine its economics by restricting trade, technology and capital flows—whether through economic means or direct subversion.

Yet, Trump’s instinct to do something is not entirely unwelcome, and some of his administration’s policies may prove promising. For example, bipartisan legislation like the Foreign Investment Risk Review Modernization Act presents an instrument to deal with China’s state-backed purchases of Western intellectual property that is somewhat more surgical than blunt U.S. tariffs. Other challenges, including China’s forced technology transfers, non-tariff barriers, and subsidies to state champions remain, and although they violate WTO rules. It seems to testify some people’s growing concerns that the economic escalation is now moving the trade dispute into the political realm, from where it had formerly been immune. First, the U.S. has already used the dubious frame of national security to make rhetorical demands as well as launch new policy initiatives to punish the Chinese firms. Second, even the issue of human rights has been inserted into the equation as the U.S. has released an export blacklist of companies with business in China’s Xinjiang Autonomous Region. Also while President Trump has been quiet enough on the riots in Hong Kong, a commentary on the topic by the Houston NBA franchise has ironically started a new row that could have major implications for the broader relationship. As Rae observed, the consequence is that debating social issues is easily a slippery slope and the intrusion of trade into China’s domestic affairs even crosses highly sensitive issues related to China’s core national interests and sovereignty. It is true that once those red lines are crossed, unraveling a pathway back will be enormously complicated.

It is understandable that China appears more optimistic or even confident in resolving the current trade war. It declared to purchase huge amount of soybeans, pork and other agricultural products from the United States, signaling that such deals will be exempt from additional tariffs imposed on U.S. goods. This is another gesture of goodwill from the Chinese side to further demonstrate its sincerity in ending the trade issues between the two sides. In the span of two days, China and the United States are supposedly to take a series of positive steps in preparation for a new round of trade talks scheduled for this talks in Washington D.C. Although China resolutely opposes any escalation in the trade war, it admits that there are no winners in a trade war, and therefore a constant escalation of tariffs is not the road to a solution. Only by adhering to the principles of equality and mutual respect, and by negotiating with a calm and rational attitude, can the dispute be defused and differences resolved. To that end, it argues for sincerity, patience and practical action needed. On the eve of the new round of talks, the two sides did have taken actions and created favorable conditions for making substantive progress, in line with the expectations of the international community.

True, as a cliché goes, where there’s a will, there’s a way. China has expected a positive result from this round of talks, but the issue is that the United States has already perceived or misperceived China exactly following the path of rising Imperial Germany one century ago. Some observers even hold that Trump’s trade approach is emotionally satisfying but diplomatically disastrous, therefore they fear his confrontational strategy and support a more cooperative economic relationship with China. Yet, in an overall sense, China has been described frequently as a rising power with patent ambition to take advantage of having a state-directed system competing in technology standards, innovation, financial politics, and geo-economics, which force the United States to seek a coordinated response. Given this, that American response should neither be blindly confrontational nor naively cooperative; instead it should be competitive. Sure competition remains the theme of the China-United States relations in the next decades. It is unclear if it takes the scenario of the cold war or the cold peace, but it is clear that the approach America will adopt would be to work with its allies to strengthen rules, set standards, punish Chinese industrial policy and technology theft, invest in research, welcome the world’s best and brightest, and create alternatives to its geo-economic statecraft. It is truly hard to predicate who might be able to play a better hand in this globalized chessboard.

Continue Reading

East Asia

Five demands, not one less: China’s test of Leadership

Irfan Khan

Published

on

There were students, doctors, lawyers, activists; in short people belong to every faction of society, who came out on the streets in a number of tens of thousands in Taipei, Taiwan, marched against “totalitarianism” what they consider China holds in the regime. Yes, it was the recent September 29, Taiwanese citizens packed to the streets for upholding solidarity with Hongkongers.

Plebeian in Hong Kong (HK)—a former British colony—is protesting for the last four months against China authority. The key reason that forced them to do so was China’s authority intervention in the city internal affairs. The episode started since March this year, following an extradition bill issued by the Chief executive of HK on the edict of China. This, however, seems a little to the people outside to HK, but it instead has grim historical facts for Hongkongers. HK-plebeian considered Chief executive of HK—Lam—pro-Beijing, while Mr Xi’s regime as despotic, who has been dreaming unified China. The current legal status of HK is linked to its special status enacted by China-British declaration, 1985. It was this, according to which the city was allotted the status of semi-autonomy with a mini-constitution. While in 1997, HK was taken to handover to China, the administration of China pledged to not intervene in HK internal affairs at least until 1947.

However, China’ s demand from HK’s administration to issue extradition bill for a HK-man who has murdered his girlfriend during visit to Taiwan. HK-plebeian considered it an example of attack by China on its internal system and has now been protesting. At a rally, protestestors contended five demands: the withdrawal of extradition bill, relabeling them as rioters, assurance of universal suffrage to choose chief executive and legislature for the city, and lastly patently investigation for police violence against the demonstrators and activists.

Are there atrocities?

Yes: Various televised recordings shows what has been going on there: They have brutally been shelled, thrown gas, and fired.

China’s view

From the day first, China viewed it the CIA’s plot aiming to stir up people against China Cumminst Party’s rule or a  foreign-led campaign against the regime.

Mark Pinkstone, an Australian journalist with 50 years of experience in Hong Kong, said, “The Basic Law, the constitutional document that supports ‘one country, two systems,’ provides freedoms of expression, speech and religion. Not one of them has been eroded since the handover in 1997. The current demonstrations are living proof of that.”

According to the Human Freedom Index monitored by the Cato Institute, based in Washington  Hong Kong is ranked No 3, trailing only New Zealand and Switzerland. The index ranks 162 countries and autonomous regions based on 79 measures of personal and economic freedom. The US is ranked 17 as measured by the same indicators.

The World Economic Forum published a survey of people from 25 nations who were asked if they thought their own government was heading in the right direction or not. The survey was conducted between October and November of 2016.

China emerged leading the pack, with 90% of its citizens responding that their government was on the right track while only 10% thought not. The US was squarely in the middle, ranked at 13, with 35% of its citizens thinking their government was going in the right direction and 65% disagreeing.

China’s leadership

Once an ideological and internationally solitary state China is now transformed to a most advanced one under the rule of communist party. It made its intriguing appearance on the chessboard of international power, however, still enduring some domestic challenges–HK is one of them. While it claims to work towards various connectivity and cooperation based projects, yet do not have efficacy to let the World its way of leaderships. Its think-tanks are either  do not want to lead or they believe in pragmatic steps rather than bolstering theoretical ideas. Even its media can not counter the west propaganda and what the consequential effects are people around the globe hear much about it from the west. The current HK’s issue is amid the problems which matter more and are the real  tests of China’s leadership.   

Continue Reading

Latest

Trending

Copyright © 2019 Modern Diplomacy