G2 to the rescue?
BEIJING – What a difference a couple of decades make.
When Paul Volcker last spoke to the International Institute of Finance — the global industry association of banks and other financial institutions — the United States was the world financial leader and China’s economy was still sleeping in the shadows. Returning this week to address the world’s bankers at their spring meeting in the Chinese capital, this time as chairman of President Obama’s economic recovery advisory team, Volcker spoke about the shifting balance of economic power in the world, where China has become the third-largest economy.
In the United States, he said, “Once proud banks and investment banks have literally disappeared or found themselves reliant on government support. We look hopefully to the new China, now economically powerful, as one of the few countries of growth in this year of 2009.”
China’s new power and potential on the global economic horizon was a main point of discussion among the bankers and economists who met in Beijing this week. As Western bankers expressed remorse and contrition over the global financial crisis, Chinese bankers spoke of ambitious plans to expand around the world.
A few couldn’t resist the temptation to point out that America’s lack of adequate regulation and supervision led to a structural collapse — a lesson, they said, for Chinese banks moving forward and seeking to break free of some government controls.
China is midway through its whole-scale reform of turning a state-owned banking system into a market-oriented one. In the early years, Chinese banks were perpetually plagued by non-performing loans and heavy-handed government controls. But amid the global crisis that started last fall, those remaining, although softened, controls have paid off, with Chinese banks exposed to far less risk than most. The question now is how China will continue with further reforms and integrate its banks and capital markets with the rest of the world’s.
The country’s economic stimulus spending is showing results, but is unsustainable long-term, the experts agreed. What will push China forward is further reform and relaxed government oversight to spur competition and innovation, they said. Whatever happens next, the banks themselves are ready to go global.
“The global financial crisis poses many new challenges to the internationalization strategies of Chinese banks,” said Ma Weihua, president and CEO of China Merchants Bank. “But I also view this as an opportunity.”
“Chinese banks now are not in the river swimming,” he said. “But you cannot always stay on the shore. You have to jump into the water.”
Besides making an even stronger case for financial reform in China, the global crisis is deepening, rather than diminishing the power of the “G2” — the new nickname for China and the United States. World financial leaders said this remains the most important economic relationship in the world, a fact that will grow as countries work to dig out of the financial crisis.
Even though Chinese officials have publicly voiced their concern over the safety of their country’s massive U.S. dollar investments, the U.S. remains the safest large economy in which China can park its investment, the bankers said. And the debt-ridden United States will remain dependent on China’s foreign-currency investments for at least the near future. With that changing financial relationship the balance of power will move even more.
There has been a “shift in the center of financial gravity from the West to the East,” said Jing Ulrich, managing director and chairman of J.P. Morgan’s China equities division.
Of course, while the political balance is certainly moving and China holds many more cards than before, there were notes of caution from both American and Chinese experts not to expect China to pull the rest of the world out of its slump. China is still an emerging country, heavily dependent on a now flailing export industry.
“The system has come a long way, but there’s also a long way to go,” said Stephen Green, group chairman of HSBC.
More GlobalPost dispatches from China:
Greetings, Earthlings, and welcome to China
Revolution? No thanks, I’m busy shopping
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