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Financial Transition in Transitional Economies: Lessons from China

Explore growth and inequality in China's dualistic economy, property rights, financial depth vs. breadth, and implications of surplus labor. Understand income distribution transitions in East Asia and Eastern Europe, Soviet-sphere privatizations, and China's financial system dynamics. Delve into the impacts of state-owned banks, foreign enterprises, and integration of financial reforms to address market inefficiencies. Learn how aligning reforms can enhance productivity and economic growth in transitional economies.

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Financial Transition in Transitional Economies: Lessons from China

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  1. Finance in Transitional and Developing Economies: China and Others Topics: • Growth and Inequality in a ‘Dualistic’ Economy • Property Rights and Distribution • Financial Depth vs. Breadth Stodder: Financial Transition, July

  2. Surplus Labor in Agriculture: Marginal Product approaches 0 Stodder: Financial Transition, July

  3. Consumption investment Agricultural Production investment (transition) Non-Agricultural Production Gus Ranis: “Labor Surplus Economies”, http://papers.ssrn.com Stodder: Financial Transition, July

  4. Surplus Labor, Dualistic Economy Nobel Prize Winning Model Developed by • Arthur Lewis (St. Lucia) • Gustav Ranis (Germany) • John Fei (Taiwan) • Growth with Equity: The Taiwan Case • (Oxford University Press, 1979) • John C. H. Fei, Gustav Ranis, Shirley W. Y. Kuo Stodder: Financial Transition, July

  5. Implications of Two-Sector Model: • Agricultural and Industrial Wages Linked, kept flat by Surplus Labor. • Wages can only rise strongly when Labor Surplus is used up. • Non-Agricultural Profits grow much faster than Wages. Stodder: Financial Transition, July

  6. Tied Wages, Japan Stodder: Financial Transition, July

  7. Tied Wages, Taiwan Stodder: Financial Transition, July

  8. Stodder: Financial Transition, July

  9. Property Rights & Distribution • East Asian Development successes linked with new broadly distributed forms of property rights. (South Korea, Taiwan, China, Vietnam) • These property rights land reforms achieve: • Better matching of labor with land resources, • Incentives for long term investment, • More liquidity in the market for agricultural property. • Broader Distribution of Financial Assets is more complex, but may have even greater long term benefits for productivity and growth. Stodder: Financial Transition, July

  10. TWO TRANSITIONS on INCOME DISTRIBUTION East-Asian: Growth and Equality Inversely Correlated East-European: No Clear Pattern Stodder: Financial Transition, July

  11. Soviet-Sphere Privatizations Large Range of Methods: • Rapid ‘Voucher’ Privatization, Czech Republic • Gradual Privatization, Hungary • ‘Oligarch’ Loans-for-Shares, Russia Stodder: Financial Transition, July

  12. China’s Financial System:Deep but not Broad We will see that Financial Assets in China: • Have unusual depth, forming an unusually high portion of GDP, but • Lack the breadth associated with other Rapidly Developing Economies, since they are narrowly confined to the Banking Sector. Stodder: Financial Transition, July

  13. Financial ‘Deepening’ Correlates with Higher GDP per capita http://unctad.org/en/docs/dp_142.en.pdf Stodder: Financial Transition, July

  14. But China’s M2/GDP ratio is out of proportion to its GDP http://www.allcountries.org/china_statistics/index.html Stodder: Financial Transition, July

  15. M2 and Household Savings Very High Proportion of GDP Stodder: Financial Transition, July

  16. http://www.allcountries.org/china_statistics/index.html Stodder: Financial Transition, July

  17. Stodder: Financial Transition, July

  18. Stodder: Financial Transition, July

  19. Volatility of Shanghai Composite Index Stodder: Financial Transition, July

  20. If Household Saving is ‘Bottled-up’ in Banks, May Pressure Excess Stock Speculation Stodder: Financial Transition, July

  21. Bank Dependency may also Weaken Response to Currency Crisis 8% 6% 4% 2% 0% -2% -4% -6% -8% t-3 t-2 t-1 t t+1 t+2 t+3 www.meti.go.jp/english/report/downloadfiles/g99W004e.pdf Stodder: Financial Transition, July

  22. Banking is State-Owned in China McKinsey Global Institute, China Capital Report, 2006 Stodder: Financial Transition, July

  23. State Banks Loan Mostlyto State-Connected Enterprises Stodder: Financial Transition, July

  24. Foreign & Private Enterprises More Efficient, Even in Similar Industries Stodder: Financial Transition, July

  25. Stodder: Financial Transition, July

  26. Integration of Reforms • Observed Problems Closely Inter-linked Undeveloped Consumer Loan Market Very Small Bond Market Limited SME Access to Capital Lack of Domestic Institutional Investors Cheap Corporate Bank Loans Small, Under-performing Equity Market Inefficient Bank Operation Stodder: Financial Transition, July

  27. Poor Credit Assessment Limited forms of Collateral • ROOT CAUSES Very Small Bond Market Undeveloped Consumer Loan Market Limited SME Access to Capital Lack of Domestic Institutional Investors Cheap Corporate Bank Loans Lack of Bank Competition Small, Under-performing Equity Market Inefficient Bank Operation Stodder: Financial Transition, July

  28. Conclusion:If Problems are Inter-Linked- Reforms must also be well-Integrated Stodder: Financial Transition, July

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