Baltic Business Research

Professor Hubert Fromlet

Roundtable presentation at the China conferences on January 10-15, 2010, in Shanghai and Hong Kong, arranged by the Global Interdependence Center (GIC), Philadelphia

1.Lagging transparency has frequently been mentioned as one of the main reasons for the still ongoing global economic and financial crisis. This conclusion was also made by the leaders of the G20 summit in London last spring, expressed in the communiqué by the following words: “Strengthened regulation and supervision must promote propriety, integrity and transparency”. Thus, improved transparency really was placed on the top priority agenda by the G20 countries. 

2. As we all know, China nowadays is – which certainly is positive and also necessary in our world of growing global financial interdependence- a member of the G20 group. Consequently, the G20 declaration for increased transparency on financial markets has been underwritten by China, too.

3. Increasing transparency is certainly an important Chinese commitment, both domestically and internationally. Improved transparency domestically leads to better financial risk management on both the Chinese micro and macro level. Since China’s financial system has its structural imbalances, more transparency also should have a positive impact on the speed of necessary financial reforms.    

4. This includes bond markets, stock markets and – very importantly – monetary policy. Increased transparency on capital markets could turn focus more and more on the institutional shortcomings – and will, eventually, lead to improvements. This would be beneficial for the Chinese economy in the longer run, particularly if monetary policy can be made more efficient by better institutional conditions and liquidity on money and capital markets.

5.  Increased transparency could also contribute to better financial literacy – an area that will turn out to be increasingly important to an emerging country like China (but also for developed countries) where people need to know and learn more about their investment and credit alternatives. More knowledge about these areas may result in a better and more customer-friendly supply of products.

6. Internationally, it seems to be very plausible to give foreign analysts, stock and direct long-term-investors more transparency on the state of the Chinese economy and corporations. Institutional and transparency shortcomings are still too high for foreigners and, consequently, impeding their analytical skills on Chinese developments – and obviously too high for the Chinese as well.

7. According to my own China panel with well-known China experts, institutional conditions have not been changing visibly during the past years (scale 1-10; 10 = very favorable): 

Institutional conditions (in general terms)	March 2009: 4.8	Dec 2007: 4.9
Transparency in economic policy	March 2009: 4.6	Dec 2007: 4.8
Trust in accounting standards	March 2009: 4.1	Mar 2004: 3.9
Trust in statistics	March 2009: 4.7	Nov 2004: 3.9

 

8.  Statistical shortcomings are still everywhere – in methods, national accounts, capital stocks, labor markets, financial markets (macro), the banks’ capital adequacy ratios, etc. But we should not forget that China is a huge country. Overnight progress cannot be achieved.  However, these limits should not rule out markedly improved transparency in the longer run.

9.  In March 2009, I asked the China analysts of my survey panel about their view on the most urgent areas to look at compared to the standards of the European financial system (despite all the European problems). As top factors were mentioned (ranked):

• Transparency  –  number 1
• Supervision
• Risk awareness / risk management
• Equity markets
• Bond markets
• Competition
• Monetary policy instruments

10.  Of course, China has made efforts in the past few years to improve transparency on financial markets – but in my opinion at a rather slow pace. But we should be humble in the West. The financial crisis showed that we had (or still have) our own shortcomings and problems.

Transparency is part of institutional economics. 2009 year´s co-winner of the Nobel Prize in Economics, Elinor Ostrom, tells us the truth when writing in a book from 2008 (“Moral Markets”, Princeton, together with David Schwab): “It is worth noting that institutions – even well-designed ones – will not lead to beneficial outcomes by themselves”. In other words: The effectiveness of institutions also depends on the people who use them – as the financial crisis has demonstrated very clearly.

Some three years ago, I made an interview for one of my publications with one of the leading China experts in the Western academic world, professor Dwight Perkins from Harvard. He summarized his view on China as follows: “One should keep in mind that the legal system still is weak. Corporate governance is weak as well. There is some progress in the accounting system – but efforts started from a very low level. Corruption can make things very difficult. Protection of minority shareholders is an alien phenomenon. These are institutional shortcomings that should be kept in mind, despite China’s strong growth rates.”

These final words of Perkins are important – and still valid. China has achieved a lot of progress in its economy. I would like to say – despite its shortcomings in institutions, particularly in transparency! However, these shortcomings can also be given a positive interpretation:

Clearly improved institutions could make a major positive contribution to future potential Chinese economic growth. This desirable development can be particularly speeded up by more transparency which probably would trigger financial and other economic reforms faster than in the current opaque system – without being urged to run too fast!