The Strategist

High-handed government interference cools China’s financial sector

07/01/2015 - 13:18

It used to be said that the world manufactured in China. But Beijing’s systematic interference in its own financial system has created a havoc and has cooled its surging economy.

On Wednesday, the World Bank verbally communicated its displeasure to China for its systematic intrusive interference in its financial system, making it clear that these will only go to potentially create instability in China’s financial markets unless Beijing takes appropriate steps to eliminate distortions in its economy.
While presenting its economic update vis-à-vis China, the World Bank welcomed the growth model Beijing has taken while noting the slowdown in its economy. The changes introduced by China, are potent and reduce its exposure to vulnerabilities fuelled by a excess of credit following the 2008 global economic crisis.
While being appreciative of the changes in its growth model, the 39 page report came down strongly on the extensive interference by the Chinese Government in its financial system, which went to undermine its own efforts at developing a sound and a robust financial system. As per its report, the extent of the intervention was such that it has "no parallel in modern market economies".
"The state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions, and regulatory policies," states the report.
Much of the fragility of Chinese financial market can be attributed to this intrusive role played by the State. In fact, this has been identified as "the main root cause" for its fragile financial sector which is best described as potentially unstable, repressed, unbalanced and costly to maintain.
As per its report, unless China takes urgent measures so as to "fundamental reform" its financial markets, it is likely to witness financial stress, debt levels of a high order as well as excess capacity.
As per its forecast, the Chinese economy is set to grow by 7.1% this year and take a dip to 7.0% the following year. In 2017 it is set to cool down even further to 6.9%.
Overcapacity, rising local debt levels and property downturns are some of the factors which are acting as a restraint on the erstwhile surging economy.