China Research

Every year Linnaeus University conducts an institutional survey among roughly 25 well-known China experts from the U.S., Europe and Asia (and twice a year on the economic outlook for the forthcoming 18-24 months). Our latest survey was published shortly before Christmas.
Today, I would like to briefly comment on some of the latest survey results that concern China’s financial sector (gradings 10=very high/very good; 1=very low/very poor).

First. Transparency on financial markets is rated at 3.3 which has to be considered really low. By the way, insufficient transparency is often mentioned as one of the main reasons for the recent subprime crisis in the U.S. and to some extent for the European crisis. This fact should be taken seriously in China, too.

Second. Corporate accounting has an unsatisfactory rating as well (December 2011: 4.9). This is the same value as four years earlier. This could be an interesting analytical angle for both Chinese and foreign investors. Further progress is badly needed.

Third. The banking system now receives a grading of only 3.8 for its marketization efforts. This is exactly the same number we noted two years ago.

Forth. The stock market – on the other hand – shows a somewhat more favorable development since 2009 – i.e. from 3.7 to 4.5. However, 4.5 is not good enough either.

Fifth. The bond market is also characterized by a slight progress in marketization during the past two years – but only from 3.5 to 4.2.

Conclusion:
This very brief summary of my recent survey clearly indicates that the institutional conditions on and the marketization of Chinese financial markets are still strongly underperforming, with grading levels around 4 (which, however, means all the same that Chinese financial markets need an efficient financial regulation and supervision). I would define these shortcomings in terms of poor allocation of credit resources, insufficient competition, prioritizing of state-owned companies, low volumes for corporate bonds, weak conditions for corporate rating and investment plans, etc. There is a lot of literature (North, Tullock, Levine, etc.) that shows that improved institutions and financial systems favor long-term economic growth.
Making a positive interpretation out of this conclusion would mean that more ambitious improvements in financial institutional and market conditions could make an important contribution to China’s future potential growth.

Hubert Fromlet
Professor of International Economics
Editorial board

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