Arthur Kroeberg at FT’s Dragon Beat blog has a worthwhile post discussing some advantages of China’s state-controlled financial system, and what our regulators might learn from it. Obviously our system can’t be like theirs, and we don’t want the same level of state control (by a long shot), but the ideas are important:
Until roughly three years ago, many outside commentators argued that China’s state-driven financial mechanism, which funnelled cheap credit to state-owned industrial enterprises with little regard to efficiency or return on capital, would inevitably generate a huge pile-up of non-performing loans leading to a financial crisis.
To generate sustainable long-term growth, they contended, China would have to adopt the vastly more efficient capital-allocation mechanism of western banking systems and capital markets.
The problem with this argument was that efficient capital allocation matters a lot in mature economies at the technological frontier with structural growth rates of 2-3 per cent. But it matters far less in developing economies where favourable demographics, a high savings rate, urbanisation and technological catch-up conspire to create a structural growth rate of above 8 per cent.
In China, where the financial system is seen as a utility facilitating the activities of the real economy rather than as an individual source of wealth creation, it can be perfectly rational to suppress its profits to increase the profits of firms in the real economy.
The resulting reduction in financial-sector rents actually makes a financial crisis less likely, because excessive risk-taking is suppressed. Read the whole thing >