25 September 2008

China does a left turn

Eighteen months ago, U.S. Treasury Secretary Henry Paulson told an audience at the Shanghai Futures Exchange that China risked trillions of dollars in lost economic potential unless it freed up its capital markets.

``An open, competitive, and liberalized financial market can effectively allocate scarce resources in a manner that promotes stability and prosperity far better than governmental intervention,'' Paulson said.

That advice rings hollow in China as Paulson plans a $700 billion rescue for U.S. financial institutions and the Securities and Exchange Commission bans short sales of insurers, banks and securities firms. Regulators in the fastest-growing major economy say they may ditch plans to introduce derivatives, and some company bosses are rethinking U.S. business models.

``The U.S. financial system was regarded as a model, and we tried our best to copy whatever we could,'' said Yu Yongding, a former adviser to China's central bank. ``Suddenly we find our teacher is not that excellent, so the next time when we're designing our financial system we will use our own mind more.''

The recent moves by Paulson, the former chief executive officer of Goldman Sachs Group Inc., contradict what the U.S. told Asian governments over the past decade. Thailand, South Korea and Indonesia were urged to let unviable banks fail during the 1997-98 Asian financial crisis.

Turning Left'
'`It's the end of an era,'' said Shanghai-based Andy Xie, a independent analyst who was formerly Morgan Stanley's chief Asia economist. ``In 1989, when the Berlin Wall fell, socialism was discredited and the whole world turned right. Now financial capital has been discredited and the whole world, including the U.S., is turning left.''

China's economy has grown an average of 9.9 percent a year since former leader Deng Xiaoping ditched hard-line Communist policies and began moving toward a free market in 1978.

Since joining the World Trade Organization in 2001, China has gradually opened its markets to foreign competition, allowing international investment banks to form joint ventures with local partners and permitting the biggest state banks to sell shares on overseas stock exchanges. In the past three years, China dropped a decade-old currency peg to the dollar, introduced foreign- exchange swaps and forwards that allow investors to hedge or bet on currency fluctuations, and expanded the bond market.

China has yet to allow margin trading -- where investors borrow money to buy shares -- or futures contracts based on equity indexes.

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