China Financial Markets » The dollar, the RMB and the euro?

The critical problem in China and the reason that it will be difficult to open the economy to the real world is that the banking system is still so backwards that it will have to be completely changed before this can actually happen.....

but for now it is worth pointing out that the Chinese banking system is one of the least efficient in the world when it comes to assessing risk and allocating capital, and would be bankrupt without repressed interest rates and the implicit (and sometimes explicit) socialization of credit risk. Beijing accepts this because of the tradeoff that gives it banking stability.

Beijing greatly values this stability, even at the expense of capital misallocation, and is in no hurry to give it up by opening up the financial markets and, what’s more, for political reasons I think local governments will resist ferociously any further corporate governance reform. Remember that the phrase “corporate governance reform” in the banking context is just another way of saying that credit decisions will be made on the basis of economic considerations, and not on the basis of government preference. That particular reform will be politically contentious.

Without a true free market, there has to be gigantic misallocations of resourses that will not generate real income or value for its citizens. Big government solutions to real world problems never work. Socialism does not create value, it only reallocates resources and many times this creates other destructive behavior.

China Financial Markets » The dollar, the RMB and the euro?