China Urged to Open Financial Services Sector
Robust capital markets can also foster balanced, sustained growth, says US Treasury Secretary
BEIJING - 10/24/05 - Greater access to financial services and robust capital markets can help China achieve balanced, sustained growth that is good for both China and the global economy, according to US Treasury Secretary John Snow.
Snow made his remarks at a recent meeting of the Securities Industry Association in Beijing, after visits to Chengdu, Mulan, and Shanghai, China's coastal financial center.
"Most of the attention involving the U.S. economic relationship with China has focused on the narrow issue of exchange rates," said Snow, urging greater currency flexibility "as just one of many economic and financial issues that would foster balance in global trade and financial flow."
Both the US and China agree that China needs to transform itself "from a primarily export-driven economy to one that is more balanced and led by domestic demand with a far greater role for the consumer," Snow said.
Recent Chinese economic growth, he said, "has depended on continued sharp increases in investment and net exports. This pattern of growth has contributed to regional and sectoral imbalances in the Chinese economy and does not provide a basis for sustained long-term growth."
For China, the development of financial services and capital markets will be vital to achieving economic balance, he said.
Financial instruments such as asset-backed securities, securitization, credit and currency derivatives, options and sophisticated hedging devices reduce the uncertainty associated with economic undertakings and facilitate economic activity that allows for greater economic development, he said, adding that the delivery of financial services to consumers "can be acquired very quickly, and with immediate benefits."
China "can quickly move forward with further liberalization of its financial services sector by allowing foreign securities firms to establish or acquire wholly-owned subsidiaries, and by expanding the scope of products securities firms can offer," he said.
"This would add liquidity and transparency to China's capital markets, increase the flow of capital to the most productive Chinese firms, inject management expertise, encourage regulatory reforms, and introduce best practices for technology, risk management, and control systems."
Snow also urged China to shift to risk-based lending "based on reforms that include rigorous credit analysis procedures, improving accounting and financial reporting standards that would help China's financial institutions improve asset quality and take advantage of higher interest rates to slow excessively aggressive asset growth."
Capital market development "is particularly necessary in China to achieve balanced growth which translates into real prosperity," Snow said.
"Financial services and capital markets exist in order to marry the accumulated resources of billions of savers and investors around the world with the myriad of investment opportunities available," he said.
It only works, he cautioned, if "not impeded by national rules that limit flows of capital, inefficient tax or regulatory structures, corruption or lack of transparency, lack of property rights, or misaligned prices signals due to interference with foreign exchange or interest rates."
China, he concluded, "is at the point where capital markets are increasingly necessary to meet the needs of its people and firms, where such markets could play a helpful role in disciplining economic agents and reducing the cost of capital."
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