A sign of China’s rising gumption in the global financial world is the opening of the European branch of Dagong Global Credit Rating Co last month — the first Asian rating company operating in the European Union.
The entry of a Chinese credit rating agency into capitalist heartland promises to bring a unique, pragmatic perspective to global financial markets.
Chinese rating agencies have always been critical of the global credit system — they have stridently criticised the traditional credit model as skewed and slammed the Western tendency to expand consumption beyond real wealth creation capability.
Until now, China’s conservative views on the global credit or money markets held little sway. But, in a post-financial crisis world, when advanced economies are in sluggish mode, China has a lead role to play as a global financier — once it establishes the Renminbi as a major international currency.
Interestingly, emerging nations represent 38 per cent of worldwide GDP but account for just 7 per cent of global foreign investment in equities and only 13 per cent of global foreign lending.
In this context, China remains the world’s largest saver; is cash-rich with more than $3 trillion (Dh11 trillion) in foreign reserves, yet remains distrustful of global financial companies, rating agencies and the Western notion of credit and investment.
A new paradigm
Hence the question needs to be asked — Poised to be one of the world’s most influential suppliers of capital in the years ahead, will China’s conservative world view change the nature of global finance forever?
No doubt the country’s financial markets are deepening, foreign investment keeps pouring in, and capital too is flowing outward in greater volumes. The value of its domestic financial assets — including equities, bonds, and loans — has reached USD17.4 trillion, trailing only the United States and Japan. That’s a more than tenfold increase in a span of two decades.
But its long-closed economy cannot — and will not — open up overnight. The most troubling question for global observers is the real state of Chinese liquidity. The propensity of planners and economists for grand infrastructure plans simply increases the collective demand for capital — sometimes far beyond the level the economy can supply.
The government continues to control investment activity by micro-managing fiscal strategy and the overall money supply through the People’s Bank of China.
In fact, the most important problem for the country is not necessarily liquidity itself, but the lack of an efficient link between savers and borrowers. There are distortions in the system, which can create excess liquidity in some parts of the economy, while shortages in others.
Many sectors in the Chinese economy have experienced increased debt levels, which are unsustainable, but a rapid withdrawal of liquidity will put them in severe difficulties. The so-called shadow banking system is likely to contract if the authorities squeeze liquidity. A large number of companies rely on shadow banking for financing, the absence of which may cripple small and medium entrepreneurs.
So gigantic is this parallel banking system that some analysts prefer to call it “‘marketisation” of a large part of the financial system — designed to escape the strict controls on interest rates imposed by the government.
No meltdown yet
If China is to be a global player, authorities need to bring this shadow banking system under proper regulatory control while at the same time ensuring that reforms across the whole banking system give a stronger role to the market, especially through interest rate reform and proper risk oversight. The strange aspect about China, however, is that despite these many systemic risks,
the probability of a meltdown of the financial system remains low.
Large banks are well capitalised with healthy liquidity, facilitated by the 20 per cent required reserves at the central bank. Barring any run on the banks, their deposits are sufficient to meet the lending demand of an economy growing at about 7 per cent.
So, when credit rating agency Dagong pontificates on the health of Western financial institutions, it will be the “pragmatic” voice of State-controlled capitalism, ready to take on its role as a global lender.
— The writer is a freelance journalist based in China.
