terça-feira, 21 de julho de 2015
Let China’s markets speak truth to power
Recent turbulence in China’s stock market has led some to conclude that the country stands on the brink of a major financial and economic crisis. The rapid decline of equity prices, these bears maintain, is a warning of contagion to come.
While it is no secret the Chinese economy faces significant challenges and headwinds, these have little to do with the sell-off in the stock market. Rather, they stem from underlying structural problems, including unfinished reforms to China’s capital markets. All equity markets are prone to boom and bust cycles. Problems arise when capital markets are under-developed — as they are in China — because these bouts of volatility are magnified.
China is especially vulnerable at this point because while its economy has grown and matured, its capital markets have lagged behind. It is no surprise that those ideologically opposed to markets would use recent events to make the opposite argument — that to prevent market instability, Beijing should slow the pace of financial liberalisation or perhaps even abandon market-based reforms altogether.
With so many retail investors in China’s stock market, a collapse of share prices affects people’s savings, incomes and welfare. Many no doubt invested because they were confident in the government’s capacity to rescue the market. This may explain, in part, why Beijing intervened so quickly when the market plummeted. Still, while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market.
No advanced economy has achieved high-income status — something to which China aspires — with a closed financial system that misallocates and misprices capital. Chinese reformers undoubtedly understand how to create a modern financial system; policymakers have studied this inside out. They have the blueprint in hand, but need to act on it boldly and quickly. If China is to have a well functioning and stable capital market — which can also help to protect investors, particularly unsophisticated individuals — it needs to allow best-in-class financial institutions and professionals, irrespective of national origin, to serve Chinese investors. In my experience, joint ventures simply do not work for global financial institutions.
China would do well to allow a wide range of participants, including top-notch foreign institutional investors, investment banks and brokers, to compete on equal footing. Exposing companies to serious competition will sort out the best institutions from underperforming ones. Beijing can further protect investors by establishing a well enforced regulatory regime designed to minimise accounting fraud and market manipulation, ensure high quality investment products, set appropriate margin requirements, and mandate high standards for the sales practices of brokers that sell to individuals.
Investors also need to be able to diversify their assets. This is one of the reasons Beijing should establish a more robust domestic corporate bond market, and allow the Chinese public to invest more of their assets in foreign securities. Beijing also needs to do more to ensure a healthy market ecosystem, including transparent accounting and disclosure standards and the presence of professional equity research firms and independent debt rating agencies.
Finally, for public equity offerings, China should move away from a registration system that depends on central government approval. Rather than being the “gate keeper”, the government should simply set appropriately high standards and criteria for companies seeking to go public, thereby depoliticising the process and letting the market be the decisive force.
Recent market tremors have led to some scapegoating of foreign speculators. This volatility should be seen instead for what it is: a sign that financial reforms have yet to be fully realised.
Keeping the present halfway house will make it harder for China to avoid the middle-income trap that has kept many emerging markets from becoming a prosperous economy. Indeed, top Chinese policymakers know they must expend greater energy to execute the reform agenda President Xi Jinping laid out 20 months ago.
For nearly four decades, China has reformed by following Deng Xiaoping’s dictum to “cross the river by feeling for stones”. It is time to more boldly cross the river to reach the other shore.
Henry Paulson, a former US Treasury secretary and chief executive of Goldman Sachs, chairs the Paulson Institute