China at the Crossroads
More than 100 researchers, practitioners and alumni participated in China at the Crossroads: FX and Capital Markets Policies for the Coming Decade organized by the Chazen Institute and Columbia’s Center for International Business Education and Research (CIBER). Panelists at the February 2–3 conference discussed such topics as openness in the banking sector, the effects of stock market listings and foreign exchange policy.
The conference was part of a two-year project to examine the challenges facing China's financial system. The results will be published early next year in a volume edited by Charles Calomiris, the Henry Kaufman Professor of Financial Institutions and academic director of the Chazen Institute and CIBER. The book is intended to guide public policy and business strategies.
“China is, of course, the centrally important country in the world right now from an international business perspective,” Calomiris said in his opening remarks. “The capital markets and foreign exchange reforms that are happening in China are the center of not just China’s future economically but, I think we can say, the world economy’s future.”
Although China has achieved extraordinary growth, its financial markets remain remarkably inefficient, the researchers have found. Without improvements, the country may experience diminishing returns, continued weakness in its stock market and increasing hidden losses from loans held by its state-controlled banks.
Lee Branstetter, the Daniel W. Stanton Associate Professor of Business, gave a presentation on the evolution of China’s financial markets since the late 1970s. He focused on three themes: the state’s role in the economy, efforts to make state-owned enterprises more efficient and macroeconomic imbalances during the reform period.
“The state still plays a central role - in fact, the central role - in the intermediation of capital in the Chinese economy,” Branstetter said. The government continues to dominate the banking sector, equity markets and new bond issues. Private firms are now better able to compete in the product and labor markets but face limited access to capital, he said.
China’s government has retained a large degree of control over its state-owned enterprises. “Reform of financial markets and reform of state-owned enterprises have been closely intertwined and will likely continue to be,” Branstetter said. “This will impose constraints on the pace of progress.”
During this period of market changes, China experienced significant economic instability, including two investment-fueled boom-and-bust cycles, Branstetter said. Although the country’s real gross domestic product was positive throughout the period, there have been significant swings in the growth rate. China entered its third investment-driven boom just three years ago. “There is concern that once again investment will decline,” Branstetter said. “Already, some sectors are trending downward.”
Even with these structural flaws, China has managed to create a financial system that operates well enough to propel one of the greatest successes in economic history, Branstetter wrote in a report that accompanied his presentation. Yet the state’s role in the economy continues to impede progress. “Separation of the state from enterprises appears to be an elusive goal,” he said. “The prospects for reform appear to be mixed.”
Many of the panelists had attended a joint conference last summer with Tsinghua University. Contributors to the research project from Columbia Business School include faculty members Calomiris; Branstetter; Geert Bekaert, the Leon G. Cooperman Professor of Finance and Economics; Robert Hodrick, the Nomura Professor of International Finance; Frederic Mishkin, the Alfred Lerner Professor of Banking and Financial Institutions; and Jialin Yu, assistant professor of finance and economics. Other authors include Fred Hu, managing director and cohead of China investment banking at Goldman Sachs (Asia), and researchers from the International Monetary Fund, the University of Toronto and the University of California, Berkeley.
China has already experienced a great deal of change in the five months since the previous conference, Branstetter said. “One of the fascinating things and one of the challenging things about doing research on China and the Chinese financial markets is that the topic is very much a moving target,” he said.
The Chazen Institute also hosts the Sir Gordon Wu Distinguished Speaker Forum, which brings business leaders and policymakers to New York to share their perspectives on China. On May 10, Victor Fung, group chairman of Li & Fung, will discuss outsourcing and supply chain management in China.