China, The IMF And The Stasis In Financial Reform,

Beijing’s response to the IMF’s recommendations on China’s financial system, published under the G20’s Financial System Stability Assessments, provides a litmus test of both the state of the balance of power between reformers and conservatives in the jockeying for position in the leadership succession, and of the balance between the economy’s optimists and the pessimists. The People’s Bank of China’s comments understandably accentuated the positives in the assessment, but there was something there, too, for those looking to read between the lines:

There are certain views in the report that are insufficiently comprehensive and insufficiently objective….Some of the recommendations such as the timeframe and the prioritisation of reforms lack a thorough understanding of China’s reality.

We have noted before that reform is running into substantial resistance from vested interests. The reformers will welcome some IMF recommendations as support for reinvigorating reform. There is nothing much new in what the IMF is suggesting, which includes increasing the role of market forces in allocating credit, currency appreciation and measures to improve corporate governance, transparency, regulatory capacity and the autonomy of regulators. Yet reformers will have to be selective about how far and hard to push on any of those fronts.

This Bystander would be remiss not to note the IMF’s acknowledgment of the health and robustness of China’s financial system, and its resilience to isolated shocks, such as could be caused by something going badly wrong in one of the economy’s danger zones – off-balance sheet lending, informal credit markets, high property prices and rapid credit expansion – and thus causing a banking crisis. The IMF’s fear, though, is that a succession or convergence of any or all of those shocks could pose a systemic risk. It sees “a steady build-up in vulnerabilities”, the cost of which “will only rise over time, so the sooner these distortions are addressed the better.”

Political conservatives and economic pessimists make common cause in not being prepared to pass control of the financial system to market forces or independent regulators lock, stock and barrel. The first group is inherently of such a mind, or stands to lose materially from that happening; the second group fears that the global economy hangs a dark cloud over China’s and has more faith in the state to resolve a financial crisis than in the ability of market forces and independent regulators to stave off one. Both groups have had their beliefs only reinforced by what has happened in Europe and the U.S. since 2008.

 

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4 Comments

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4 responses to “China, The IMF And The Stasis In Financial Reform,

  1. dylanjones

    And interesting that the IMF finished the report back in June, but it is only released now?!

  2. China Bystander

    The field work was conducted in the second half of last year, and the report not completed until June. It would then have to work its way through the sausage machine of IMF protocols. As it is (i) a FSAP assessment and (ii) China’s first, that would all take time. — CB

  3. vokoyo

    Japan arrest of a Chinese fishing captain within the 12-nautical-mile territorial sea surrounding the Diaoyu Islands has again inflamed relations between the two great East Asian powers.

    China claim to the Diaoyu Islands is based on the “discovery” of unclaimed territory and derives from a range of Chinese governmental contacts and references going back to 1372.

    Japan claim is also based on the “discovery” of supposedly unclaimed territory, despite the fact that official Japanese documents, several of which were unearthed by Taiwan scholar Han-yi Shaw, demonstrate that the Japanese government was well aware of China historic claim when it began to take an interest in the islets in 1885.

    During the subsequent decade, contrary to the assertions now made by Japan, its officials not only failed to complete surveys of the islets necessary to confirm their alleged unclaimed status, but also recognised that the matter “would need to involve negotiations with Qing China”.

    To avoid China suspicion, Japan chose to conceal its intention to occupy the islets “until a more appropriate time”. That time came in January 1895, when Japan by then on its way to defeating China in their 1894 war, adopted a Cabinet decision that the islets were Japanese territory. Yet even that Cabinet decision was not made public until after the second world war.

    Moreover, if the US were to become an impartial mediator, it would have to note that Japan claim to sovereignty over the islets is based on a distorted version of late 19th century history that does not pass the international smell test.

    It is time for Japan to reassess its views on the international law of the sea. Those of its views that are plainly irresponsible only discredit others that deserve serious consideration.

    Perhaps most insulting to the world community is its claim that the rock called Okinotorishima that constitutes Japan southernmost “land”, a reef system with land at high tide no larger than a king-sized bed, is entitled to an EEZ and continental shelf.

    • China Bystander

      vokoyo, We welcome points of view on any China-related subject, but please try to keep comments relevant to the post in question. We have written extensively about the maritime disputes between China and Japan, most recently at http://wp.me/p5IOc-1jB, which would be a more relevant forum for your views. –CB

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