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China: The Coming Market In Financial Services. By Stephen Green.
May 2, 2002

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  • Comment Board
  • For any transitional economy, opening up the financial sector is like sailing between the twin perils of the Charybdis and Scylla. Go slow, limit competition and continue to direct finance towards state-owned enterprises (SOEs), and the banks will quickly become overwhelmed by non-performing loans (NPLs). But go for broke, privatise major financial institutions, liberalise interest rates, and hope that the lack of institutions will not be a problem and disaster is again guaranteed. Either way, historical experience suggests that financial crisis is inevitable. If overvalued exchange rates and capital flight do not get you, it seems that excessive government debt and poor lending practices will. Name the developing country that has liberalised its financial sector over the past twenty years and not suffered some form of crisis. You can discount Mexico, Brazil, Russia, Argentina and almost all of East and South East Asia.

    But not the People’s Republic of China (PRC). Financial reforms in the PRC began in the mid-1980s, after the initial economic reforms in the late 1970s in agriculture and industry. So far, a major financial crisis has been avoided.

    The received wisdom asserts that China’s ‘gradualism’, as opposed to the ‘shock therapy’ (rapid price liberalisation and privatisation) wrought on Eastern Europe, is working. Some also assert that China has avoided crisis through keeping the multilateral lending institutions, the IMF and World Bank, at arm’s length. While they have offered much valuable advice, neither the Bank nor the Fund have both enjoyed significant leverage, meaning that Chinese policymakers can meander, backtrack and fudge more than those who are tied to a loan.

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