Please enter your email address

Please login to print this page

3 Ways China Can Build a Deep Capital Market

These days, Chinese President Xi Jinping is a busy man in a take-no-prisoners state of mind. And this is exactly what China needs. During the first half of 2014, Xi’s people have arrested more than 60,000 bureaucrats in its investigations of corruption. What brought China close to a crisis in 2012 was not accounting fraud, excess bank lending or punk earnings. Pure and simple, it was runaway corruption and runaway greed.

That is all changing. People are more than a little scared now and are toeing the line. Former security chief Zhou Yongkang, whose untouchability was once considered to rival that of J. Edgar Hoover, the mid–20th century director of the U.S. Federal Bureau of Investigation, is under virtual house arrest and is being investigated by a Communist Party body. His hoard of wealth, worth more than $15 billion, will be returned to the state. Other cases like this are coming down the pike. This overdue attention to illegal activity at high levels is a very bullish sign that corruption is China’s Public Enemy No. 1.

Xi’s anticorruption drive has scared not only bureaucrats but also businessmen, who now are on notice that there can be severe consequences for white-collar crime. This is a long overdue development, one that is good for Chinese markets. Shareholders will not return to the financial markets until they are confident there is a level playing field that is being monitored and regulated.

The crackdown on corruption is only one side of the coin. Xi is also moving ahead with efforts to liberalize China’s financial markets. Last November, the Third Plenum of the Communist Party’s 18th Central Committee endorsed further liberalization, building on the principles in the 12th Five-Year Plan, outlined and endorsed in 2011. Both point to more aggressive moves to spread securitization and deepen the capital markets. This liberalization is now baked into the Chinese cake. There is no going back.

The foundation of this plan is very simple. China’s Achilles’ heel is that unsecured bank credit is about 40 percent of total capital circulating throughout the system. (The other types of capital are equity, corporate debt and government debt). The only other countries at these levels are in Eastern Europe. The global average is 20 percent. This dependence on bank credit must fall to below 30 percent in the next few years.

Leave a Comment    (0)

  • POST