Wire: BLOOMBERG News (BN) Date: 2008-09-24 12:04:34
By Zhao Yidi and Kevin Hamlin
Sept. 24 (Bloomberg) -- Eighteen months ago, U.S. Treasury
Secretary Henry Paulson told an audience at the Shanghai Futures
Exchange that China risked trillions of dollars in lost economic
potential unless it freed up its capital markets.
``An open, competitive, and liberalized financial market can
effectively allocate scarce resources in a manner that promotes
stability and prosperity far better than governmental
intervention,'' Paulson said.
That advice rings hollow in China as Paulson plans a $700
billion rescue for U.S. financial institutions and the Securities
and Exchange Commission bans short sales of insurers, banks and
securities firms. Regulators in the fastest-growing major economy
say they may ditch plans to introduce derivatives, and some
company bosses are rethinking U.S. business models.
``The U.S. financial system was regarded as a model, and we
tried our best to copy whatever we could,'' said Yu Yongding, a
former adviser to China's central bank. ``Suddenly we find our
teacher is not that excellent, so the next time when we're
designing our financial system we will use our own mind more.''
The recent moves by Paulson, the former chief executive
officer of Goldman Sachs Group Inc., contradict what the U.S.
told Asian governments over the past decade. Thailand, South
Korea and Indonesia were urged to let unviable banks fail during
the 1997-98 Asian financial crisis.
`Turning Left'
``It's the end of an era,'' said Shanghai-based Andy Xie, a
independent analyst who was formerly Morgan Stanley's chief Asia
economist. ``In 1989, when the Berlin Wall fell, socialism was
discredited and the whole world turned right. Now financial
capital has been discredited and the whole world, including the
U.S., is turning left.''
China's economy has grown an average of 9.9 percent a year
since former leader Deng Xiaoping ditched hard-line Communist
policies and began moving toward a free market in 1978.
Since joining the World Trade Organization in 2001, China
has gradually opened its markets to foreign competition, allowing
international investment banks to form joint ventures with local
partners and permitting the biggest state banks to sell shares on
overseas stock exchanges. In the past three years, China dropped
a decade-old currency peg to the dollar, introduced foreign-
exchange swaps and forwards that allow investors to hedge or bet
on currency fluctuations, and expanded the bond market.
China has yet to allow margin trading -- where investors
borrow money to buy shares -- or futures contracts based on
equity indexes.
`It's Ironic'
Since China permitted securities backed by assets such as
mortgages in 2005, only 14 such instruments have been approved
for sale, according to the Web site run by China Government
Securities Depository Trust and Clearing Co., the country's
biggest debt clearing house.
China's financial institutions were slow to buy the
mortgage-related securities that triggered the U.S. meltdown,
incurring just $4.3 billion in losses and writedowns, according
to data compiled Bloomberg.
Globally, banks have written down more than $520 billion as
the credit crisis led to the demise or makeover of Wall Street's
five biggest investment banks. In response, the U.S. government
nationalized insurer American International Group Inc., as well
as mortgage giants Fannie Mae and Freddie Mac.
``It's ironic Paulson has become the manager of many large
financial institutions,'' said Wang Jun, a finance specialist at
the World Bank in Beijing. ``He will have to ask the Chinese
leaders about their experience of managing state-owned assets.''
`Double-Edged Sword'
Plans to introduce many financial products, including
derivatives, may be shelved as China focuses on improving risk-
management, said Fan Wenzhong, deputy head of research at the
China Banking Regulatory Commission, at an industry conference
Sept. 18 in Beijing.
``Financial innovation is a double-edged sword,'' Fan said.
``We can't just concentrate on product innovation and overlook
the need to build the financial system.''
Derivatives are contracts whose value is derived from
stocks, bonds, loans, currencies and commodities, or linked to
specific events such as changes in interest rates or the weather.
Eventually, China's leaders will have to take a cue from the
U.S. and western Europe by allowing more competition to provide
cheaper funding for companies and consumers, said Fraser Howie,
co-author of ``Privatizing China: The Stock Markets and Their
Role in Corporate Reform'' (Wiley 2003).
Rethinking Strategies
``China doesn't have any choice except to continue with the
U.S. model because there is no competing system,'' he said.
``More people die in cars than they did on horses, but are people
going to say we should stick with horses?''
Even so, company bosses are rethinking their strategies.
China Life Insurance (Group) Co., parent of the country's
biggest insurer, once planned to emulate New York-based AIG,
which offers annuities, holds real estate assets and leases
aircraft, in addition to selling insurance.
``We used to look at AIG as our model and think, `That's
where we want to go,''' said Zhang Fengming, vice president of
the firm's asset management arm. ``Now it's got restructured,''
so China Life will focus on its main business.
The China Insurance Regulatory Commission will create a
``new road'' for insurers, Li Kemu, the agency's vice chairman,
said at the Sept. 18 conference, without elaborating.
That road may be different from the one Paulson proposed 18
months ago, according to Arthur Kroeber at economic research
company Dragonomics Advisory Services Ltd. in Beijing.
``China's made it clear it won't listen to these snake-oil
salesmen who come from Wall Street, even if they're wearing suits
issued by the Treasury Department,'' he said. ``It's strengthened
the hands of all the people who are very skeptical about
financial liberalization in China.''
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