avenues for private savings in post-reform china

8/3/2019 Avenues for Private Savings in Post-Reform China

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REFORMANDDEVELOPMENTOFCHINA’SFINANCIALSECTOR

WhatAboutUs?

AvenuesforPrivateSavingsinPost-ReformChina

MichaelA.J.Tanenbaum

4/27/2009




M.Tanenbaum-2

I.Introduction

Ina1998articleinForeignPolicymagazine,ProfessorDavidM.Lamptonwrote,“Chinaisagiant

screenuponwhichoutsidersprojecttheirhopesandfears.Expectationsofeconomicgaincoexistwith

worriesaboutfinancialcrisis;shrillalarmsaboutChinesepowerwithdireforecastsofcollapse;visionsof

democraticchangewithcaricaturesofcurrentreality”(Lampton,1998,p.13).Overadecadelater,thecharacterizationofChinaasacanvasremainsapt.Theworld’sprofessionalandamateurcommunityof

China-watchersobservestheAsiangiantthroughtheirlensesofpersonalexperiencesandindividual

concerns,withopinionsdivergingtoacacophonousequilibrium.

However,thefoundationalbasisoftheworld’sconcernwithChinastemsfromanopinionon

whichalllaymenandspecialistsagree:since1978Chinahasundergonetremendouseconomicchange.

China’spost-1978economicreformshavetouchedeverysectoroftheeconomydeeply.Withinthis

processofreform,theBeijinggovernmenthasrightlyidentifiedthefinancialsystemasvitaltothe

emergentsuccessofChinaasaprosperousnation.Despitehaltingadvances,thirtyyearsafterthestart

ofDengXiaoping’sreforms,theChinesefinancialsystemfindsitselflargelymarketized,betterableto

distributetheeconomy’scapitalthaneverbefore,andonacleartrajectorytowardfurtheralignment

withtheprinciplesandpracticeofWesternfinance.

Withinfinancialsystems,myriadfinancialinstitutionsandindividualactorspursueprofitby

connectingsavingswithinvestmentopportunities.Financialinstitutionsutilizetheeconomy’ssaved

fundsandguidethemtowardprofitableinvestmentprojects,orsaversplacemoneyintoprojects

themselvesthroughdirectfinance.Inreturn,saversreceiveareturnfortheuseoftheirfunds.Inthe

caseofChina,thereexistsadeepliteratureonhowpost-1978macroeconomicpolicychangeshave

boostedChina’sfinancialsystemefficiency.Oftenneglected,however,aretheimpactsofthosetop-

downpolicyshiftsonindividualretailsavers,andthepaletteoffinancialoptionsthosesaversarefreeto

employ.Thispaperexaminestheevolutionandgrowingdiversityofprivatesavingsoptionsfacingthe

retailsaverfrom1978tothepresent.Becausethefinancialsystem’s raisond'êtreisthematerial

bettermentofsocietythroughtheproductivedirectionofcapital,theimpactofChina’sfinancialsystem

reformsonindividuals’abilitytoearnhealthyreturnsonsavingsdeservesclosescrutiny.

Despitemajorsystemlevelchanges,theportfolioofsavingsoptionsavailabletotheChinese

retailsaverremainsseverelyrestricted.Evenaccessibleavenuesyieldsubstandardreturns.InaMarch

2007speechinShanghai,formerU.S.TreasurySecretaryHenryPaulson,noted,

InadequaterewardtosavingshurtstheChinesepeople.WhileChina'speopleworkeverybitashard–ifnotharder

–thanpeopleinothereconomies,theyarenotyetaswelloff.Today,Chinesecitizenshave$2trillion–or16trillionRMBattoday'sexchangerate–depositedinbanks,earningonaveragea2.5percentreturn.Afterinflation

andtaxes,therealreturnonbankdepositsisprobablynegative.Peopleinmanyotherpartsoftheworldhave

morechoicesofwhereandhowtosave,androutinelyearnamuchbetterreturn–ofteninthehighsingledigits

evenineconomiesthatarenotgrowingnearlyasfastasChina(Paulson,2007).




M.Tanenbaum-3

Thispaperarguesthatdespitesignificantmarketizationandliberalizationofeconomicbehavior

atthefirmlevel,theindividualChinesesaverhasyettoexperienceasimilarrelaxationofrestrictionson

opportunitiesforhissavings.ThediscussionbeginswithaninvestigationofChinesesavingspatterns,to

demonstratetheneedforefficientsavingsavenues.Second,thepaperexaminesavenuespresently

availabletoChinesesaversandhowsaverscopegiventherestrictionsontheireconomicbehavior.In

thethirdandfourthsections,thepaperstudiestheinteractionofsavingspatternswithavailable

vehicles,withimplicationsforpolicyreformsthatwouldallowgreaterutilityfromhouseholdsavings.

Thefifthsectiondiscusseschangestothemacroeconomysince1978withaneyetotheirimpactonthe

individualsaver’sfinancialliberty,concludingthatindividualfinanciallibertylagsbehindthefinancial

freedomenjoyedbyfirms.

II.HedgingPredictableCalamity:AHolisticExplanationforChineseSavingsPatterns

a.BytheNumbers

TounderstandChinesesavingsvehicles,onemustfirstunderstandChinesesavingspatterns.Qin

andRennotethatevenwhenadjustingformeasurementdifferences,Chinesehouseholdssave15.87%

moreoftheirdisposableincomeonaveragethanU.S.households.Usingstandardizedmeasurement

metrics,theaverageChinesehouseholdsavingsratefrom1992-2001was22.69%(Qin&Ren,2008).

Furthermore,fromapeakofover20%,householdsavingshassettledatroughly16%ofGDPusing2005

data.Bycomparison,asfigure1shows,ChinesehouseholdsavingsasapercentageofGDPin2005were

roughly11.2%higherthanU.S.householdsavingsin2002(Kuijs,HowwillChina'sInvestment-Savings

BalanceEvolve?,2006,pp.6-7).Itisimportanttonotethatthesefiguresdonotaccountforthenegative

savingsimpactoftheU.S.subprimemortgageandensuingfinancialcrises.

Figure1-Source:Kuijs,"HowwillChina'sSaving-InvestmentBalanceEvolve?"




M.Tanenbaum-4

b.ExplainingChineseSavingsPatterns

ExplainingChina’sunusuallyhighhouseholdsavingsratesisamoredifficultexercise.One

contentionoftencitedbythepopularpressarguesthatChinese,andAsiansgenerally,comefroma

“cultureofsavings,”wherebythereexistsaculturalpreferenceforsavingsoverconsumption.Asa

result,Asiansocieties’savingsratesareseveraltimesgreaterthantheirWesterncounterparts.Though

thisargumentfailsintuitively–whowouldprefertodeferconsumptionforthesakeofit?–journalists

andstumpedeconomistscontinuetofallbackonculturalsavingsarguments.

Inaseminal1994paper,Carroll,Rhee,andRheeeffectivelydebunktheculturalsavings

argument.Inabrilliantnaturalexperiment,Carrolletal.examinedthesavingspatternsofimmigrantsto

Canadafromdifferentregions.Ifcultureisamajorfactorinthesavingsdecisionsofanindividual,then

presumablyadultimmigrantsfromhighsavingssocietieswouldcontinuetosaveatahigherratethan

immigrantsfromlowsavingscountriesornativeCanadians.Theiranalysisfound,“thatsavingpatterns

ofimmigrantsdonotvarysignificantlybyplaceoforigin.”Instead,“independentoftheirorigin,

recentimmigrantssavelessthanCanadian-borncitizens,andthatovertimethedistinction

betweenthebehaviorofimmigrantsandthatofnative-borncitizensdiminishes”(Carroll,Rhee,&

Rhee,1994,p.687).

IfculturecannotaccountforChinesesavingsrates,alternativeexplanationsareneeded.Kuijs

citestheextantliteratureasfocusingonforfourmainreasons,“commonlyseenashavinghada

particularlysignificantroleinChina”(Kuijs,HowwillChina'sInvestment-SavingsBalanceEvolve?,2006,

p.8).Theyare:demographics,incomegrowth,ashiftofhealthandeducationexpensesfromthe

governmenttotheindividual,andalackoffinancialsectordevelopment.

ThedemographicchangesunderwayinChinaaremostlytheresultoftheone-childpolicy,

institutedin1979.UsingtheLife-CycleHypothesis(LCH)developedbyFrancoModigliani,wecan

observetheimpactofdemographicshiftsonChinesegrosshouseholdsavingsbehavior.TheLCH

predictsthatindividualswillseektosmoothconsumptionovertheirlifetime,savinglittlewhenyoung,

increasinglymoreastheyworkandgetclosertoretirement,anddrawdownontheirsavingsafter

retirement.Ina2004paperbyModiglianiandCao,analysisofempiricaldatafoundthatChinesesavers

followthepredictionsoftheLCH.Giventhelowerbirthratesforthepast30years,thenumberof

workingadultsrelativetoyoungdependentshasincreased.Asaresult,savingshaveincreasedasthis

glutofworkerscollectsforretirement.Whentheseworkersretire,savingsrateswilldeclineasthey

drawonpensionsandsavings.Furthermore,childrenarethetraditionalsourceofold-agesupportinChina,butthereisjustifieddoubtthatonechildcanbeartheburdenofmaintainingtwoagingparents

(Modigliani&Cao,2004,p.165).

TheLCHalsoaccountsforthesecondreasonforhighChinesesavings–incomegrowth.TheLCH

arguesthatsavingsarenotdependentonGDPpercapita,butratherGDPgrowth.Asfigure2

demonstrates,Chinesehouseholdsavingsratiosarehighlycorrelatedtoincomegrowthovertime.




M.Tanenbaum-5

Figure2-Source:ModiglianiandCao,"TheChineseSavingPuzzleandtheLife-CycleHypothesis"

Additionally,thepost-1978reformsintroducedagreaterdegreeofuncertaintyforChineseworkers,

becauseofthedisappearanceofguaranteedemploymentandsocialservices.The“breakingoftheiron

ricebowl”incentivizes“precautionary”savingsasaprotectionagainstanuncertainfutureemployment

outlook(Chamon&Prasad,June2008,p.5).

Anothermotivationforsavingsliesinthecertainfutureneedtofundeducationandhealthcare

expenses.Becauseof,“theuncertaintyandlumpinessofthoseexpenditures,”householdsseekasavings

cushion(Chamon&Prasad,June2008,p.15).InChamonandPrasad’ssample,“thefractionof

households…forwhichhealthexpendituresexceed20percentoftotalconsumptionexpenditures…has

risenfrom1percentin1995to7percentin2005”(Chamon&Prasad,June2008,p.15).Inthepre-1978

economy,thestatewasresponsibleforhealthandeducationexpenses.

Lastly,thefinancialsectorhasyettodevelopaconsumercreditmarket.Asaresult,insteadof

borrowingtofinancelargepurchases,“Chinesehouseholdsaremorelikelytorelyontheirsavings”

(Chamon&Prasad,June2008,p.15).In2005,Chineseconsumercreditstoodatabout17%ofGDP,

whichissimilartootherdevelopingcountries,butmuchlowerthanthedevelopedworld(Kuijs,Howwill

China'sInvestment-SavingsBalanceEvolve?,2006,p.9).Becauseconsumerscannoteasilyaccesscredit

forlargepurchases,theymustaccumulatesavingsovertimetopaythefullpurchasepriceincashup

front.Thisresultsinlargerbankdepositsforlongerperiodsassavingsaccumulate.




M.Tanenbaum-6

III.TheBestofWhat’sAround:ChineseSavingsChoicesGivenPresentOptions

a.BankDeposits

Asof2006,over90%ofChinesenetfinancialinvestmentwasinsavingsdeposits(Kuijs,Howwill

China'sInvestment-SavingsBalanceEvolve?,2006,p.7).Thecentralgovernmentmaintainsaceilingon

interestratespaidonsavingsdeposits,aswellasaflooronloaninterestrates,toensurebankshavea

healthyprofitmargin.Asaresult,mostChinesesaversearnzeroornegativereturnsonsavingsdeposits

afterinflation(Wu,2005,p.221).Theartificiallylowreturnsaversreceiveondemanddepositsforms

thefoundationofNicholasLardy’sdefinitionoffinancialrepression.Henotesthatin2002,thePeople’s

BankofChina(PBOC),“fixedthemaximuminterestratebankscouldpayondemanddepositsat

0.72percent,aratethatremainsunchanged.Butinflation,asmeasuredbytheconsumerpriceindex,

tickedupbyalmost9percentagepoints,”fromthatpoint,makingtherealreturnonbanksavings

depositscloseto-7.28%(Lardy,2008).

b.Equities

Beyondbankdeposits,otheravailableavenuesforsavingsincluderealestate,Chineseequities,

andtoamuchmorelimitedextent,insurance.Chineseallacrossthecountrytradeinequities,butare

limitedtoonlythosesharestradedinthedomesticmarkets.Desireforbetterreturnsoverbank

depositsandthelargenumberofunsophisticatedinvestorsinChinaleadsto“extremepricevolatility,”

intheformsofbubblesandbursts(Lardy,2008).

Figure3-ShanghaiCompositeIndex2000-2009




M.Tanenbaum-7

Figure4-ShanghaiCompositeIndex,1992-2009

Lookingforward,“thereislittledoubtthatChina’sstockmarket,inspiteoftheNovember2007

marketcorrection,remainsinbubbleterritory”(Bottelier,TheEvolutionofBankingandFinanceinChina

-DomesticandInternationalAspects,2007,p.8).TherisksassociatedwithovervaluedChineseequities,though,areuncertain.Ontheonehand,“buyingonmarginis officiallyprohibited(andbelievedtobe

rare)inChina,”whichreducessystemicriskintheeventoffurthercollapse.However,Bottelier

estimatesthatover60millionhouseholdsownstock,soanysignificantpricedeclinecouldhurt

householdbalancesheets(Bottelier,TheEvolutionofBankingandFinanceinChina-Domesticand

InternationalAspects,2007,p.8).Asthefiguresabovehighlight,theChineseequitiesmarketsare

subjecttohugeswingsovershortperiods,whichnodoubthasdeleteriouseffectsformanyhouseholds.

c.RealEstate

WhenChinaimplementedthereformandopeningpolicy(gaigekaifangzhengce)inthelate1970s,netaveragelivingspacepercapitainChinawasroughly4%ofU.S.levelsin2001(Gibson,2009,

p.3).Despiteaddingvastamountsofnewhousingfrom1949-1978,thedemandforresidentialspacefar

outpacedsupply.Partofthereasonforthisdisequilibriumlayinthefactthatstate-ownedenterprises

(SOEs)wereresponsibleforprovidinghousingforemployees,andtheyhadlittleincentivetospend

moreonimprovingemployeehousingthannecessary.

WiththeSOEreformsbeguninthelate1980s,enterpriseswerenolongerresponsiblefor

providingsocialbenefitstoemployees,suchashousing,healthcare,schools,etc.,whichhadbeena

tremendousburdenonSOEprofitability(Bottelier,ClassLecture,2009).The1988NationalHousing

ReformPlanmadetheprivatizationofChinesehousinganationalpriority.ThegovernmentinstructedSOEstoselltheirexistinghousingstocktoemployeesatareasonablediscount,asincomeswerestilltoo

lowtoclearthemarketofresidences.Thegovernmentalsoguaranteedtherightofindividualstosell

andbequeathpurchasedpropertiesatthistime.Lastly,rentswereincreasedsharplytomakeresidential

ownershipmoreattractive.NeilGibsonaptlyphrasesthegovernment’sattitude,writing,“Whetherthe

Chinesepeoplelikeditornot,theyweregoingtobetherecipientofasignificanttransferofwealth”

(Gibson,2009,p.6).




M.Tanenbaum-8

Unfortunately,inrecentyearsrealestatehasbeensubjecttoitsownbubble.Withtheapproval

oftheGuaranteeLawin1996,householdscouldusetheirapartmentsascollateralformortgagestobuy

newer,biggerapartments.Theoriginalapartmentwouldoftenbekeptasarentalproperty(Gibson,

2009,pp.10-11).Thistrendresultedincascadingdemand,creatingaspeculativehousingbubble.

Everyonefromschoolteacherstocabdriversfelttheycouldplaypart-timelandlord(ChenK.,2004).

SOEsthemselvesbegantoinvestinlandastheysoughtadestinationforretainedearningsinexcessof

profitableinvestmentopportunities(Gibson,2009,p.15).Fearfulofarealestatecollapsesimilartothe

Japan’sintheearly1990s,theChinesegovernmentdeliberatelyprickedtherealestatebubbleinearly

2007.Thecentralgovernmentimplementednewrestrictionsonaccesstomortgages,andthebuilding

communityrespondedbyslowinggrowth(Bottelier,ClassLecture,2008).Thoughchoosingtoprickthe

realestatebubblerepresentedsoundeconomicpolicy,itarrivedjustbeforetheglobaleconomywas

dueforcollapsewiththeonsetoftheU.S.subprimemortgagecrisis.

c.Insurance

InsurancecontinuestogrowatexponentialratesinChina,butpenetrationremainsquitelow.OnlyonepercentofGDPinChinaisspentoninsuranceyearly(Lloyd's,2007).The2007

PricewaterhouseCoopersupdateonthestateofforeigninsurancecompaniesinChinafoundthat,

“althoughtheinsurancemarketasawholeisbeginningtomature,theindividualconsumerdoesnot

seemconvincedaboutwhythereisaneedforinsurance.Considerableeffortsonawarenessbuilding

andeducationarerequired”(PricewaterhouseCoopers,2007,p.15).Untilconsumersthemselvesare

convincedoftheneedforinsurance,itwillremainanunderdevelopedavenueforpersonalsavings.

IV.StepstowardaBetterTomorrow:PolicyInitiativestoAchieveGreaterUtilityforSavers

InLampton’s1998ForeignPolicyarticlecitedabove,heasks,“WillBeijingrecapitalizeitsbanks

andoperatethemonsoundfinancialprinciples?...AndwillChinatackletheproblemofstate

enterprises…whosebaddebtstothebanksaretheprincipalcauseofthe…system’scurrentwoes?...Can

Chinameetthesechallengesandavoidseriouspoliticaldislocation?Nobodycanbesure”(Lampton,

1998,p.19).Elevenyearslater,weknowtheanswer:ChinacananddidreformthebanksandSOEswith

greatsuccessandwithout“seriouspoliticaldislocation.”Incomparisontotheveryseriousanddifficult

taskofrecapitalizingthebanksandreformingscleroticSOEs,reformingtheretailsavingssystemis

relativelyeasy,asretailsaverscanbecountedontorespondtotheincentiveswithwhichtheyare

presented.

a.ExpandingHealthInsurance

Usingcross-sectionalmicroeconomicdata,ChamonandPrasadargue,“thattheeliminationof

theriskofhealthexpendituresexceeding20percentofincome(throughacatastrophicinsurance

scheme)wouldhaveloweredthemediansavingratein2005by3.5percentagepoints”(Chamon&

Prasad,June2008,p.25).Indeed,theiranalysisfinds,“Theincreasingprivateburdenofeducationand

healthexpendituresseemsoneofthestrongestcandidatesforexplainingtheincreaseinsavingrates”




M.Tanenbaum-9

(Chamon&Prasad,June2008,p.25).Insteadofeachhouseholdsavingenoughtocovermassive

medicalexpenses,significantwelfaregainsmaybeobtainedfromtheimplementationofsocialhealth

insuranceprogrammesbyimprovingrisk-sharingmechanismsandbyallocatingtheresourcesof

householdsmoreefficientlyovertime”(Chou,Liu,&Huang,2004,p.295).Asacomparisonwitha

similarlyhighsavingssociety,theintroductionof“NationalHealthInsurancereducedsavingbyan

averageof8.6–13.7%”inTaiwan(Chou,Liu,&Hammitt,2003).

Recognizingtheabilityofhealthinsurancetostimulatespendingandtheneedtoboost

consumptioninruralareas,theChinesegovernmentannouncedinJanuary2009thatitwillspendover

US$120billionoverthreeyearstoboosthealthcareinfrastructureandexpandhealthinsurancecoverage

(Fairclough,2009).Thoughtheplandoesincludesomefundstosubsidizeinsurancepremiums,thereis

stillampleroomtoencouragethecreationoflow-costprivatehealthinsuranceschemescoveringonly

catastrophicaccidentsandillnesses.Forexample,accordingtotheNationalDevelopmentandReform

Commissionpolicyreleaseof6March2009,only150billionRMBwastobeallocatedtothebroad

categoryof“medicaltreatment,publichealth,education,cultural,andsocietaldevelopmentprojects”

(PRCNationalDevelopmentandReformCommission,2009).

b.LegitimizingUndergroundFinance

InhergroundbreakingstudyofundergroundfinanceinChina,Prof.KelleeTsaiwrote,“Asofthe

endof2000,lessthan1percent ofloansfromtheentirenationalbankingsystemhadgonetothe

privatesector.Businessownerstaketheirexclusionfromformalsourcesofcreditforgranted…howhas

China's'economicmiracle'beenfinanced?Theshortanswer:informal,andoftenillegal,finance”(Tsai,

2002,pp.2-3).WithinChina,thereareamultitudeofinformal,unregulatedsourcesofcreditforsmall

andmediumsizedbusinesses,rangingfrominterpersonallendingtofullundergroundbanks.Lardy

quotesthesumofinformalloansoutstandingat,“RMB10trillion,equivalenttoalmostathirdofthe

loansextendedthroughthebankingsystem”(Lardy,2008,p.5).

Ifpresentlyillegalsourcesofcreditcouldbelegalizedandregulated,China’ssavingswould

declinefortworeasons.First,saverswouldbeabletoearnmorecompetitivereturnsondepositsat

theseinstitutions.Second,theselenderswouldprovideexactlythesortofflexibleaccesstocreditthat

wouldmakeprecautionarysavingsunnecessary.Forexample,ifsavershadtheoptiontotaptheequity

intheirhomes,saverswouldnotneedtokeeplargedepositsofliquidassetsasahedgeagainstmajor

expenses.Theselendinghouseswouldalsocontinuetoprovidefinancingandcreditforgoods

purchases,obviatingtheneedtoholdcashtocoveranydurablegoodspurchase.

c.ObstaclestoProposedReforms

Asstalledreformsdemonstratetimeandagain,thesensibilityofareformprojectcarrieslittle

weightifconcurrentpolitical-economicconcernslieinopposition.Asnotedabove,theprospectof

increasingretailsavers’savingsoptionsholdsgreatpromiseforsolvingseveralofChina’spressing

economicissuesandraisingutilityforsocietyasawhole.Understandingtheconcernsofentrenched

interestspreventingpositivechangeprovidesausefulframeworkformovingtowardsreform.




M.Tanenbaum-10

Contrarytopopularbelief,thekeybeneficiaryofthetightsavingscontrolsinChinaisthe

government.Lardyarguesthatwhilegovernmentceilingsoninterestratespaidondepositsandfloors

onloaninterestratesguaranteesacomfortableoperatingmarginforbanks,muchofthatbenefitis

erodedbygovernmentpolicieswhichforcebankstoholdcentralbankbills.Tomaintainthestabilityof

theYuanagainstforeigncurrencies,thePBOChasintervenedsignificantlyintheforeignexchange

markets.TopreventinflationaryeffectsfromtheintroductionofYuan,China’scentralbanksterilizes

muchofthenewYuanissuesbysellingcentralbankbillstotheChinesebanks.Thesecentralbankbills

payverylowinterest,andarethereforeanimplicittaxonbanks.Furthermore,since2007,thecentral

bankhasincreasedthereserveratiobanksarerequiredtoholdtofurtherreducethemoneysupply.The

opportunitycostofthisovercapitalizationofChinesebanksisanotherimplicittaxonbanks.Lardy

estimatesthatthecostoftheseimplicittaxesforbanksin2007was230billionRMB(Lardy,2008,p.3).

FinancialrepressionisakeytooltoensurethatcentralbanknotescanbeplacedwiththeChinesebanks

forsterilizationpurposes.Anyattempttoreformandliberalizesavingsoptions,therefore,mustbe

concomitantwithreformofChina’sexchangeratepolicy.

V.FortheFirm,theLion’sShare:Macro-LevelFinancialChangesandtheRetailSaversTheyForgot

ThoughtheChinesefinancialsystemhasmadegreatstridesinjustafewshortdecadestowards

integratingwiththeworldeconomy,theChineseleadershipfavorsstabilityoverthechancefor

improvedgrowth.Despiteinstitutionalreluctance,Chinahasachievedsignificantchangesinthenature

andoperationofitsfinancialsystem.ThoughessentialforandakeycontributortoChina’s

unprecedentedgrowth,thesemacrolevelchangeshavefailedtoimprovetheretailsavers’financial

libertytothesamedegreethattheyhaveopenedtheoperatingspaceoffinancialfirms.

InUnderstandingandInterpretingChineseEconomicReform,JinglianWunotesinasingle

paragraphthetremendouschangesfacingthefinancialsectorastheeffectsofthe1978reformsbegan

toplayoutinthefinancialmarketplace.In1981,theMinistryofFinancelegalizedbondissues.From

1980-1985,Chinawitnessedtheemergenceofcommercialpaper.In1986,thePBOCbegantoallow

financialinstitutionstotradeassets.In1987and1988,Chinaestablishedsecondarymarketsforbond

trading.By1990-1991,ChinahadtwofullyfunctioningstockmarketsinShenzhenandShanghai(Wu,

2005,pp.219-220).Inasingledecade,thecentralgovernmentoversawthecreationofadomestic

financialsystem.Asabenchmark,onecouldnotethattheprivatesectorwasonlyformallyrecognizedin

theconstitutionalamendmentsof2001(Steinfeld,2002,p.384).

China’sprocessoffirm-levelfinancialopeninghascontinuedasChinapreparedtoenterthe

WTOandinthefulfillmentofWTOcommitmentsthroughoutthe2000s.FinancialsectorreforminChina

enjoyedthedubioushonorofanareatheChinesegovernmentseemedintentonprotectingfrom

foreigncompetition.Writingin2001,JohnLangloisnotedin TheChinaQuarterly ,“Thefinancialsector

provisionsoftheagreementsprovideforsignificantpointsofentrytotheChinesemarketsbyforeign

participants.Buttheyembodyprotectionistprinciples…Chinaevidencesareluctancetopermitforeign

competitioninthefinancialsector”(Langlois,2001,p.610).Langloisattributesthisreluctancetoa

desirebytheChinesegovernmenttoholdontothereignsofcapitalforpoliticalreasons(Langlois,2001,

p.611).




M.Tanenbaum-11

Despitethegovernment’saversiontofinancialsectorliberalization,thetermsofChina’sWTO

accessionincluded(1)liftinggeographicalrestrictionsforwherefinancialfirmscouldoperate;(2)

allowingforeignfinancialfirmstocompeteforChineseclients;and(3)easethelicensingrequirements

forbanksandfinancialinstitutions.By2006,however,foreignfinancialplayersheldonly2%ofthe

domesticChinesemarketandfacedsignificantobstacleswhentryingtoopennewbranches(Moody's

InvestorsService,2006).Despitethesedrawbacks,a2007industrysurveybyPricewaterhouseCoopers

foundthatmostforeignbanksoperatinginChinahadstrongintentionstostayandfurtherintegrate

withandparticipateintheChinesedomesticmarket(PricewaterhouseCoopers,2007).

WhilelargecompaniesandmajorfinancialplayersareoperatinginChinawithincreasing

freedomandenjoyingawiderrangeofdebtandequityfinancing,theretailsaverfacesthesamechoices

availabletoChinesesaversforcenturies.Besidesbankdeposits,equityholdings,andrealestate,which

werefinancialoptionsavailabletoChinesepre-1949,therehasbeenlittlemovement.Indeed,asProf.

Tsainotes,themainsourceoffinanceformostSMEscomesfromunderground,non-sanctioned,largely

unregulatedfinancialinstitutions.Indeed,foreignersobservingChinesesocietyintheearly20th

century

notedtheexistenceofcreditcooperativesandlocalfinancialorganizationsestablishedforbusinessoragriculturalfinancing(Mallory,1931,p.492).Themethodsofpaymentandpracticeswerewell

established,andbolsteredbyofficiallegalobligations,collateral,andasystemofguarantors(Gamble,

1944,p.46).Mostinterestingisthatthesesystemsofsharedsavingsandcreditcontinuedtoexistin

somecapacityevenaftertheestablishmentofthePRCandwellintoMao’stenureasparamountleader

(Jones,1967).

VI.Conclusion

Avenuesforretailsavingshavefailedtoreapthebenefitsoffinancialmodernizationinother

areasofChina’seconomy.Thebenefitsofpooledrisks,consumercredit,andthemyriadfinancial

combinationsthatretailsaversandindividualconsumersenjoyinothersocietiesremaindeniedto

mainlandChinese.Incontrast,theconcertedlobbyingofinternationalfinancialactorsandforeign

governmentshavebroughtsignificantchangeandincreasingopennessintheparticipationofforeign

firmsandliberalizationofChina’sfinancialmarkets.ThoughSec.Paulson’scommentthat“Inadequate

rewardtosavingshurtstheChinesepeople”remainsclear,whatremainsunclearisthetimeframe

withinwhichretailsaversinChinacanexpectchangeandincreasedliberty.Giventhatexpandingthe

Chineseretailsaver’sportfolioofoptionsholdsgreatpromiseforaddressingoutstandingeconomicand

financialconcerns,onecanonlyhopethathorizonisnear.




M.Tanenbaum-12

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