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January 21, 2007
Expect some financial modernization in China in the next year
China just wrapped up a major policy conference. We know a little about what was discussed. The rest, I presume, will be gradually revealed as piecemeal reforms such as we have seen for the last several years.
China Daily reports:
Among the key initiatives announced by Premier Wen Jiabao at the two-day National Financial Work Conference which is held every five years were:
The three policy banks, which are State-owned lenders that concentrate on meeting the country's economic goals instead of profitability, will be commercialized, starting with the China Development Bank. The other two are the China Export and Import Bank and the Agricultural Development Bank of China.
Agricultural Bank of China (ABC) will be restructured. ABC is the only one of the "Big-Four" State-owned banks not listed.
"ABC will strengthen its role as a financial service provider for farmers and county-level businesses," Wen said, adding that the restructure would be across the board and the bank's businesses would not be split.
The government will push for innovation in providing financial services for rural areas and build a multi-tier rural financial structure.
The bond market will receive special attention in the development of the capital market with an emphasis on corporate bonds.
From the U.S. point of view, it seems that they buried the lede.
Managers of the country's huge foreign exchange reserves are encouraged to "explore new means and extend channels" for the use of the money.
The Wall Street Journal didn't miss it:
Global financial markets are likely to zero in on what the weekend meeting means for China's dollar policy. Mr. Wen said nothing about selling dollars, but currency traders are hypersensitive to any signs Beijing is losing its appetite for the U.S. currency. Wang Qing, an analyst at Bank of America in Hong Kong, said the message of the conference is twofold: Beijing intends to encourage imports in a bid to erode its currency reserves, and it is planning to create an entity that will invest a portion of the reserves. For markets, "this might rekindle this talk of diversifying the reserves" away from dollar-denominated assets such as U.S. Treasurys, Mr. Wang said.
Indeed. But the Chinese clearly have their own reasons for doing something. In a related story at China Daily:
Excess liquidity has mainly been blamed for the country's runaway investment, and the central bank has raised commercial banks' reserve requirements four times and interest rates twice since April 2006.
Zhou Xiaochuan, governor of the central bank, said earlier this month that the PBOC does not rule out taking more measures to dampen liquidity.
The bank said yesterday that it would "continue to follow a prudent monetary policy and resort to multiple monetary policy tools" to achieve sound economic growth.
The central bank said the flexibility of the renminbi exchange rate regime has significantly improved since the path-breaking foreign exchange reform in July 2005.
"The role of the market will be further promoted in the setting of the renminbi exchange rate."
China Daily columnist You Nuo sees the result of modernization:
Not all the Financial Work Conference's policy proposals have yet been released to the public, as the nation's key financial institutions are still holding their own meetings to set their work agenda for the year that has just begun.
But whatever the specific policies, the stage is already set for China's domestic capital market to show unprecedented liquidity and become one of the world's main magnets for investor money.
Rumor abounds in Chinese-language financial newspapers about millions of US dollars pouring into the Chinese stock market, now partially open to overseas investors.
And yet...
Having said all this, it will be for the benefit of the entire world if the central government in Beijing can handle its "financial work" with new concepts and new skills. Despite the old name, Beijing's financial work is vastly different now from just two years ago, and increasingly changing. There will be a day, not far from now, when the renminbi is fully convertible and the A-share market completely open to international investors, including all the hot money that can easily throw a careless government into a helpless state.
Indeed.
Posted by William Polley at January 21, 2007 8:17 PM
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