China Research

More recently, I have been writing quite a lot about Chinese financial deregulations in articles various articles and also on this blog side – the developments so far and the needs for the future. Special challenges like the issues of timing, sequencing, reforming volumes and speed have been particularly addressed. Mistakes in these areas can be punished very sharply. (More about these challenges in my forthcoming paper “The Chinese Reform Process in a European Perspective” which will be referred to in our Chinaresearch.se blog that will be published in the beginning of August).

So far, nothing directly negative can be said about the already deregulated parts of the Chinese financial markets. The least complicated areas have been or will be approached in the near future – hopefully cautiously and timely. This hope may be justified since China’s political leaders do not like financial experiments. But not all experiments can be avoided in a deregulation process – and certain financial experiments can be more risky than others.

Two weeks ago, the The Bank of Finland’s Institute for Economies in Transition (BOFIT, with a most inviting front page, interesting references, news and articles) had a short message about the fascinating and opaque topic of Chinese local debt. One could read there: “This week the finance ministry said it would move ahead with a plan to allow ten local administrations issue their own bonds. The ministry is allowing local governments this year to sell bonds with a combined value of up to 400 billion yuan (EUR 47 billion)…”

The is a very desirable reform step – this time on an experimental basis which seems to be appropriate. But five questions should urgently be answered by relevant Chinese decision-makers when details on these ten local bond issues are about to be published :

¤ How are the interest rates for these local bonds to be set?

¤ Who will be allowed to purchase these bond issues?

¤ How will these local bonds be traded?

¤ Where are the rating agencies which can check the Chinese bond market independently?

¤ What about transparency of these local bonds?

Even if China still has not arrived at the more critical cross-border parts of financial deregulation, more attention should be paid to transparency already from now onward. This process should be intensified without reluctance.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

Back to Start Page