I am an optimist about China. Some commenters mistakenly assume I am a China booster. Actually, I don’t at all like the authoritarian nature of their political system or the gross inefficiencies of their economic system. There’s nothing for us to emulate.
I’m an optimist because each time I visit China (and I plan to return this summer) I see dramatic changes. Yes, it’s repressive and wasteful, but far less so than a few decades earlier. And as this important story in the new issue of The Economist shows, the reforms roll onward relentlessly:
INFORMAL lending is rampant in China. Although some private banks like Minsheng do lend to small enterprises, the official banks that dominate Chinese banking prefer to lend to well-connected state firms. Many Chinese entrepreneurs have been forced to turn to shadow banks. . . .
At the end of March officials announced that Wenzhou, a dynamic city in Zhejiang, would be named a “special financial zone” in which two pilot schemes will be introduced. First, informal moneylenders will be encouraged to register as private lending institutions free to operate with the blessing of the state. Second, private citizens in Wenzhou will be allowed to invest up to $3m each directly in non-bank entities abroad, without the need for a formal government intermediary.
These moves are welcome. Legitimising black-market finance could accelerate economic growth by deepening the pool of capital available to the country’s cash-starved entrepreneurs. Michael Werner of Sanford C. Bernstein, an investment bank, also points out that such a reform would help by giving legal remedy in case of default. At the moment, there is none. During last year’s crunch in Wenzhou, for example, some bankrupt bosses simply boarded up their factories and fled town.
The move to allow direct overseas investment is also a promising step towards opening up China’s capital account. At the moment mainland residents can legally move only a pittance abroad in any given year. If the pilot scheme is expanded, the opening could help ease upward pressure on property prices by offering punters another way to seek high returns. Frederic Neumann of HSBC thinks allowing money to flow abroad could ease the “financial repression” of low interest rates for savers.
Tantalisingly, Wen Jiabao, the prime minister, this week declared that the “monopoly” grip of state-run banks must be broken, and hinted that the reforms in Zhejiang would be expanded nationally if successful. Officials also almost tripled the amount of foreign investment allowed in China’s capital markets, to $80 billion.
Chinese market reforms began in rural Anhui during 1979. But the urban reforms began in the 1980s in Wenzhou, which is China’s most entrepreneurial city. The Chinese government tends to try new policies on a small scale before rolling them out nationwide. Often the reforms simply legalize what is already occurring. That was true of the move away from communes in the late 1970s and early 1980s, and it’s true of the current banking reforms. But legalization is very important, as it puts business people in a much less precarious position, especially in a country where prosecution for economic crimes can be politically motivated.