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.
China Bystander 