Sta­bil­ity corner­stone of mar­ket re­sponse

China’s patch­work of fi­nan­cial su­per­vi­sion and reg­u­la­tions is con­sis­tent with a dif­fused frame­work in mak­ing de­ci­sions

China Daily (Canada) - - BUSINESS -

Western crit­i­cism of the gov­ern­ment’s pol­icy re­sponse to China’s mar­ket tur­moil ap­pears to miss the point. Many ex­pressed views that of­fi­cials failed to fully un­der­stand how the mar­kets op­er­ated or failed to de­velop poli­cies suf­fi­ciently so­phis­ti­cated to cope with the prob­lems.

Let us look at the mis­con­cep­tion that Chi­nese pol­i­cy­mak­ers lacked mar­ket in­sight. Even ca­sual observers of the coun­try’s econ­omy would rec­og­nize the in­creased pres­ence of for­eign firms and pri­vate in­no­va­tion, and the di­min­ished role of the State.

State-owned com­pa­nies re­tain a dom­i­nant role in crit­i­cal ar­eas of the econ­omy, but pri­vate en­ter­prise and mar­ket-based so­lu­tions have been vi­tal to China’s rapid in­dus­tri­al­iza­tion and de­vel­op­ment.

Still, the gov­ern­ment’s aver­sion to fi­nan­cial in­sta­bil­ity means there are lim­its when it comes to em­brac­ing mar­ket-based prin­ci­ples. Although the stock mar­ket is small in the broader macroe­co­nomic pic­ture, a pe­riod of free fall would sit un­com­fort­ably with the author­i­ties.

In this con­text, mar­ket in­ter­ven­tion in the past two months was less about deny­ing that prob­lems ex­isted than main­tain­ing sta­bil­ity. Of course, it would have been bet­ter if poli­cies had been rolled out be­fore the eq­uity bub­ble started to in­flate.

In­stead, the gov­ern­ment ac­tu­ally played an ac­tive role in en­cour­ag­ing in­vest­ment in the mar­ket last year. This pro­vided even stronger mo­ti­va­tion to in­ter­vene dur­ing the re­cent cor­rec­tion.

This brings us to the gov­ern­ment’s re­sponse. The “na­tional team”, or public in­sti­tu­tions, in­volved in pro­vid­ing di­rect and in­di­rect sup­port to the stock mar­ket has been por­trayed as dis­jointed and in­ef­fec­tual.

It has been ar­gued that with so many in­sti­tu­tions in­volved, in­clud­ing the Min­istry of Fi­nance and the Peo­ple’s Bank of China, it was dif­fi­cult to work out which body had the cred­i­bil­ity or au­thor­ity to take a lead­ing role.

In the United States, for ex­am­ple, dur­ing a sim­i­lar mar­ket cri­sis, the Fed­eral Re­serve played a piv­otal role, while in the eu­ro­zone it was the Euro­pean Cen­tral Bank.

But, again, this ar­gu­ment sim­ply misses the point. China’s patch­work of fi­nan­cial su­per­vi­sion and reg­u­la­tions is con­sis­tent with a de­lib­er­ately dif­fused pol­icy frame­work, with State or­ga­ni­za­tions op­er­at­ing col­lec­tively un­der the ul­ti­mate guid­ance of the coun­try’s po­lit­i­cal lead­ers.

As such, China’s author­i­ties are un­likely to con­clude from the crit­i­cism that they need to ap­point an Alan Greenspan, the for­mer chair­man of the Fed, to per­son­ify eco­nomic au­thor­ity. It is equally un­likely that there will be a huge over­haul, re­sult­ing in a “su­per­reg­u­la­tor”.

Of course, as the mar­ket climbed, debt lev­els started to rise through mar­gin trad­ing, which in­volves in­vest­ing with bor­rowed money. The pol­icy re­sponse to the tur­moil that fol­lowed also raised debt lev­els.

In July the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion re­laxed mar­gin lend­ing re­quire­ments of bro­kers, re­vers­ing a trend ear­lier this year. The CSRC was also re­ported to have ex­tended credit of 260 bil­lion yuan ($40.94 bil­lion) to bro­kers, with fund­ing from the bond mar­ket, banks and the PBOC.

Ad­di­tion­ally, the China Bank­ing Reg­u­la­tory Com­mis­sion al­lowed banks to take a more flex­i­ble ap­proach to cor­po­rate loans col­lat­er­al­ized with eq­ui­ties, and en­cour­aged them to lend to listed com­pa­nies en­gaged in stock “buy­backs”.

This ini­tia­tive, while it is likely to in­crease debt, should not be in­ter­preted as a change in pol­icy di­rec­tion, as one of the gov­ern­ment’s over­rid­ing ob­jec­tives re­mains a re­duc­tion of debt in the econ­omy.

The risks of po­ten­tial sol­vency prob­lems have been cen­tral to the ac­cep­tance and adop­tion of lower eco­nomic growth tar­gets. But, as with other im­me­di­ate pol­icy chal­lenges in China, the author­i­ties see a fur­ther build-up in debt as a short­term so­lu­tion.

The au­thor is global head of sov­er­eigns, Fitch Rat­ings. The views do not nec­es­sar­ily re­flect those of China Daily.

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