The head of one of China’s top think tanks says that the heavy emphasis placed upon regulation of the Chinese financial sector comes as a direct response to the errors highlighted by recent US history.
Li Yang, the head of China’s National Institution for Finance & Development and a member of the Chinese Academy of Social Sciences, said that China’s current prioritisation of financial risk prevention and the strengthening of financial regulation is a direct response to the recent history of the global finance sector.
Speaking at a recent forum on financial management and development, Li pointed out that the Great Financial Crisis was preceded by approximately three decades of innovation, regulatory loosening and liberalisation in the global finance sector.
While this trend may have spurred financial development, yet also led to complacency within the sector and an increasing remove from the real economy.
Li said that China can look to the experience of the US for reference purposes, in order to avoid making any “major errors” during its own process of financial development.
Taking the expansion of bank balance sheets in the US as an example, Li said that when the GFC took place these capital infusions were welcome events. Now that we’ve entered the post-GFC era, however, many problems are likely to arise from efforts to shrink balance sheets, which as far more difficult than expanding them.
“We can absorb the lessons of their experience, to enable us to travel a little further on our own path,” said Li. “Certain measures require strong government and strong methods for implementation.
“This is precisely what China has, and for this reason certain situations can be brought to halt very quickly.”
Li calls for greater regulatory coordination
Li said that current problems in China’s financial sector are primarily the result of a lack of coordination within the regulatory system.
According to Li the regulatory system serves as a framework that plays a guidance role, and that anticipated results cannot be achieved if guidance has problems.
For this reason, Li believes that the most important outcome of China’s recent National Financial Work Conference was the announcement of plans to establish a Financial Stable Development Commission under the State Council.
Chinese regulators set to crackdown on shadow banking
Li also flagged a crackdown on China’s shadow banking in the near future, revealing that it would be a key focus of regulatory efforts in the near future.
According to Li China’s shadow banking sector differs in key respects from those of other countries. While Western shadow banking usually involves new forms of financial innovation, Chinese shadow banking has been strongly characterised by regulatory arbitrage, which has a disparate impact ion the economy.