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Supporters of economic reform in China have not had much to cheer over the last few years, but there are growing hopes that the transition to a new generation of national leaders over the course of 2012-13 will kick-start the policy agenda. Ahead of the reshuffle at the top, China’s major financial regulatory positions were changed in late 2011, and the new head of the China Securities Regulatory Commission (CSRC), Guo Shuqing, has been showing what can be done by a policymaker with an agenda.Mr Guo was elevated to the head of the CSRC from a position in charge of China Construction Bank, one of the top four state-owned lenders. He is well regarded in the financial sector and has a depth of experience—in addition to his past post at CCB he has also held senior roles at the People’s Bank of China (PBC, the central bank) and State Administration of Foreign Exchange. When his appointment was announced, many held high expectations that he would prove more aggressive advancing reforms than his conservative predecessor, Shang Fulin.
Few, however, expected things to move quite so quickly. Since taking over in October, Mr Guo has overseen a notable increase in the permitted level of foreign investment in China’s security markets through the qualified foreign institutional investor, or QFII, programme (including renminbi-denominated QFII flows from Hong Kong). The number of foreign financial institutions qualifying under the programme has also increased sharply, and Mr Guo has also promised to clear the backlog of QFII applications that have built up.
In accelerating the QFII programme he has probably enjoyed favourable timing. Allowing increased inflows of capital could put upward pressure on the renminbi, increasing the troubles of the nation’s exporters, and the government would probably have looked less favourably on the policy if the country’s shrinking foreign exchange reserves in the last few months of 2011 had not shown that capital was, on balance, flowing out of the country during the period. Nevertheless, Mr Guo has used the moment well, and in doing so has also supported the PBC’s goal of advancing capital account liberalization.
The CSRC’s moves regarding the domestic capital markets may prove to be even more important. In February the CSRC published for the first time a list of companies that had applied to list on China’s stock exchanges. The commission has also declared that it will no longer take part in the initial review process for listings on Shenzhen’s ChiNext exchange for growth stocks. These moves will increase the pressure on regulators not to manage the value of the stock markets through controlling listings. They also confirm Shenzhen as the most market-driven exchange in China—Shanghai’s stock exchange remains dominated by bigger, more valuable firms, but they are largely state-controlled and their market listings exert little influence over their management.
In addition to these other moves, the CSRC oversaw the launch of simulated trading of futures in government treasury bonds in February, and has confirmed that it expects to allow firms to start issuing riskier high-yield “junk” bonds in 2012. The latter move has the potential to help alleviate financing constraints on firms in the private sector, who often find it harder to secure funding from banks than SOEs.
The CSRC’s moves under Mr Guo are not likely to turn China into a haven for financial services overnight. The bond market’s successful development will remain contingent upon interest rate liberalization, for example, and there is still no sign of movement on the long-awaited international board, allowing foreign firms to list in Shanghai. Nevertheless, the reforms are a welcome sign of forward momentum that can be built upon over the next few years. They also come in lock step with a new sense of confidence from the PBC, which seems to have gathered a policy consensus that should support fundamental reforms in fields like exchange rate policy, interest rates and capital account opening. These changes will challenge China’s economic growth model, and will face a growing tide of opposition from entrenched vested interests over the coming months. However, if the current course can be held there is reason to be optimistic that China may over the next five to 10 years at last develop a financial sector that is less suppressed and distorted by the influence of the state. The rewards, in terms of new financial sector jobs and higher productivity from more efficient allocation of capital within the economy, could be huge.
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