Financial Reform

By Arthur Kroeber

“China’s spirit”, opined the People’s Daily in a recent editorial, is a “Great Wall” built to ward off global crisis.

In purple prose heralding China’s recent heroic successes, the editorial extols the Communist Party for leading China back from the global economic abyss after the country recorded 7.9 per cent growth in the second quarter of this year.

“This situation in China is in sharp contrast with Western developed nations, where the economic growth has kept sliding,” it concludes.

The nauseating tone of the editorial reminds us of a famous quotation by the Roman historian Livy, explaining why the Carthaginian commander Hannibal failed to destroy the Roman Empire.

“Capua was Hannibal’s Cannae,” Livy wrote. It is a judgment that China’s leadership (and smug editorial writers) would do well to heed today.

By Tom Miller

And lo, did Beijing wave its magic wand, and there was much rejoicing!

China’s economy grew 7.9 per cent faster in the second quarter of this year than it did during the same period last year. That means GDP expanded by 7.1 per cent in the first half and is now set to hit the government’s magic 8 per cent target for the year.

Beijing’s massive fiscal and monetary stimulus appears a roaring success. The combination of central government deficit spending and a tsunami of bank loans mean that the total amount of extra cash pumped into the economy above a business-as-usual scenario could be in the order of US$1,000bn this year alone.

But paying for stimulus projects is putting strain on local finances. Only around 30 per cent of the stimulus cash will come from central coffers, with the rest provided by local governments and companies, largely paid for by bank loans and bond issuances.

By Arthur Kroeber

Since 2006, financial reforms in China have been stuck in a rut. But for a number of reasons – most simply because Beijing now has little choice – we are now convinced that financial reform is going to be a far bigger part of the China story over the next three years.

The basic reason for this belief is not the intentions of regulators but brute economic reality.

By Arthur Kroeber

We had the somewhat qualified pleasure last week of attending the spring meeting of the International Institute of Finance — the assemblage of the great and the good of the world banking industry— which this year was held in Beijing.

Although as usual for such events there was a certain amount of high-level pabulum, two clear messages emerged from the cogent presentations by Chinese speakers.

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