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REFORMANDDEVELOPMENTOFCHINA’SFINANCIALSECTOR
WhatAboutUs?
AvenuesforPrivateSavingsinPost-ReformChina
MichaelA.J.Tanenbaum
4/27/2009
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I.Introduction
Ina1998articleinForeignPolicymagazine,ProfessorDavidM.Lamptonwrote,“Chinaisagiant
screenuponwhichoutsidersprojecttheirhopesandfears.Expectationsofeconomicgaincoexistwith
worriesaboutfinancialcrisis;shrillalarmsaboutChinesepowerwithdireforecastsofcollapse;visionsof
democraticchangewithcaricaturesofcurrentreality”(Lampton,1998,p.13).Overadecadelater,thecharacterizationofChinaasacanvasremainsapt.Theworld’sprofessionalandamateurcommunityof
China-watchersobservestheAsiangiantthroughtheirlensesofpersonalexperiencesandindividual
concerns,withopinionsdivergingtoacacophonousequilibrium.
However,thefoundationalbasisoftheworld’sconcernwithChinastemsfromanopinionon
whichalllaymenandspecialistsagree:since1978Chinahasundergonetremendouseconomicchange.
China’spost-1978economicreformshavetouchedeverysectoroftheeconomydeeply.Withinthis
processofreform,theBeijinggovernmenthasrightlyidentifiedthefinancialsystemasvitaltothe
emergentsuccessofChinaasaprosperousnation.Despitehaltingadvances,thirtyyearsafterthestart
ofDengXiaoping’sreforms,theChinesefinancialsystemfindsitselflargelymarketized,betterableto
distributetheeconomy’scapitalthaneverbefore,andonacleartrajectorytowardfurtheralignment
withtheprinciplesandpracticeofWesternfinance.
Withinfinancialsystems,myriadfinancialinstitutionsandindividualactorspursueprofitby
connectingsavingswithinvestmentopportunities.Financialinstitutionsutilizetheeconomy’ssaved
fundsandguidethemtowardprofitableinvestmentprojects,orsaversplacemoneyintoprojects
themselvesthroughdirectfinance.Inreturn,saversreceiveareturnfortheuseoftheirfunds.Inthe
caseofChina,thereexistsadeepliteratureonhowpost-1978macroeconomicpolicychangeshave
boostedChina’sfinancialsystemefficiency.Oftenneglected,however,aretheimpactsofthosetop-
downpolicyshiftsonindividualretailsavers,andthepaletteoffinancialoptionsthosesaversarefreeto
employ.Thispaperexaminestheevolutionandgrowingdiversityofprivatesavingsoptionsfacingthe
retailsaverfrom1978tothepresent.Becausethefinancialsystem’s raisond'êtreisthematerial
bettermentofsocietythroughtheproductivedirectionofcapital,theimpactofChina’sfinancialsystem
reformsonindividuals’abilitytoearnhealthyreturnsonsavingsdeservesclosescrutiny.
Despitemajorsystemlevelchanges,theportfolioofsavingsoptionsavailabletotheChinese
retailsaverremainsseverelyrestricted.Evenaccessibleavenuesyieldsubstandardreturns.InaMarch
2007speechinShanghai,formerU.S.TreasurySecretaryHenryPaulson,noted,
InadequaterewardtosavingshurtstheChinesepeople.WhileChina'speopleworkeverybitashard–ifnotharder
–thanpeopleinothereconomies,theyarenotyetaswelloff.Today,Chinesecitizenshave$2trillion–or16trillionRMBattoday'sexchangerate–depositedinbanks,earningonaveragea2.5percentreturn.Afterinflation
andtaxes,therealreturnonbankdepositsisprobablynegative.Peopleinmanyotherpartsoftheworldhave
morechoicesofwhereandhowtosave,androutinelyearnamuchbetterreturn–ofteninthehighsingledigits
evenineconomiesthatarenotgrowingnearlyasfastasChina(Paulson,2007).
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Thispaperarguesthatdespitesignificantmarketizationandliberalizationofeconomicbehavior
atthefirmlevel,theindividualChinesesaverhasyettoexperienceasimilarrelaxationofrestrictionson
opportunitiesforhissavings.ThediscussionbeginswithaninvestigationofChinesesavingspatterns,to
demonstratetheneedforefficientsavingsavenues.Second,thepaperexaminesavenuespresently
availabletoChinesesaversandhowsaverscopegiventherestrictionsontheireconomicbehavior.In
thethirdandfourthsections,thepaperstudiestheinteractionofsavingspatternswithavailable
vehicles,withimplicationsforpolicyreformsthatwouldallowgreaterutilityfromhouseholdsavings.
Thefifthsectiondiscusseschangestothemacroeconomysince1978withaneyetotheirimpactonthe
individualsaver’sfinancialliberty,concludingthatindividualfinanciallibertylagsbehindthefinancial
freedomenjoyedbyfirms.
II.HedgingPredictableCalamity:AHolisticExplanationforChineseSavingsPatterns
a.BytheNumbers
TounderstandChinesesavingsvehicles,onemustfirstunderstandChinesesavingspatterns.Qin
andRennotethatevenwhenadjustingformeasurementdifferences,Chinesehouseholdssave15.87%
moreoftheirdisposableincomeonaveragethanU.S.households.Usingstandardizedmeasurement
metrics,theaverageChinesehouseholdsavingsratefrom1992-2001was22.69%(Qin&Ren,2008).
Furthermore,fromapeakofover20%,householdsavingshassettledatroughly16%ofGDPusing2005
data.Bycomparison,asfigure1shows,ChinesehouseholdsavingsasapercentageofGDPin2005were
roughly11.2%higherthanU.S.householdsavingsin2002(Kuijs,HowwillChina'sInvestment-Savings
BalanceEvolve?,2006,pp.6-7).Itisimportanttonotethatthesefiguresdonotaccountforthenegative
savingsimpactoftheU.S.subprimemortgageandensuingfinancialcrises.
Figure1-Source:Kuijs,"HowwillChina'sSaving-InvestmentBalanceEvolve?"
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b.ExplainingChineseSavingsPatterns
ExplainingChina’sunusuallyhighhouseholdsavingsratesisamoredifficultexercise.One
contentionoftencitedbythepopularpressarguesthatChinese,andAsiansgenerally,comefroma
“cultureofsavings,”wherebythereexistsaculturalpreferenceforsavingsoverconsumption.Asa
result,Asiansocieties’savingsratesareseveraltimesgreaterthantheirWesterncounterparts.Though
thisargumentfailsintuitively–whowouldprefertodeferconsumptionforthesakeofit?–journalists
andstumpedeconomistscontinuetofallbackonculturalsavingsarguments.
Inaseminal1994paper,Carroll,Rhee,andRheeeffectivelydebunktheculturalsavings
argument.Inabrilliantnaturalexperiment,Carrolletal.examinedthesavingspatternsofimmigrantsto
Canadafromdifferentregions.Ifcultureisamajorfactorinthesavingsdecisionsofanindividual,then
presumablyadultimmigrantsfromhighsavingssocietieswouldcontinuetosaveatahigherratethan
immigrantsfromlowsavingscountriesornativeCanadians.Theiranalysisfound,“thatsavingpatterns
ofimmigrantsdonotvarysignificantlybyplaceoforigin.”Instead,“independentoftheirorigin,
recentimmigrantssavelessthanCanadian-borncitizens,andthatovertimethedistinction
betweenthebehaviorofimmigrantsandthatofnative-borncitizensdiminishes”(Carroll,Rhee,&
Rhee,1994,p.687).
IfculturecannotaccountforChinesesavingsrates,alternativeexplanationsareneeded.Kuijs
citestheextantliteratureasfocusingonforfourmainreasons,“commonlyseenashavinghada
particularlysignificantroleinChina”(Kuijs,HowwillChina'sInvestment-SavingsBalanceEvolve?,2006,
p.8).Theyare:demographics,incomegrowth,ashiftofhealthandeducationexpensesfromthe
governmenttotheindividual,andalackoffinancialsectordevelopment.
ThedemographicchangesunderwayinChinaaremostlytheresultoftheone-childpolicy,
institutedin1979.UsingtheLife-CycleHypothesis(LCH)developedbyFrancoModigliani,wecan
observetheimpactofdemographicshiftsonChinesegrosshouseholdsavingsbehavior.TheLCH
predictsthatindividualswillseektosmoothconsumptionovertheirlifetime,savinglittlewhenyoung,
increasinglymoreastheyworkandgetclosertoretirement,anddrawdownontheirsavingsafter
retirement.Ina2004paperbyModiglianiandCao,analysisofempiricaldatafoundthatChinesesavers
followthepredictionsoftheLCH.Giventhelowerbirthratesforthepast30years,thenumberof
workingadultsrelativetoyoungdependentshasincreased.Asaresult,savingshaveincreasedasthis
glutofworkerscollectsforretirement.Whentheseworkersretire,savingsrateswilldeclineasthey
drawonpensionsandsavings.Furthermore,childrenarethetraditionalsourceofold-agesupportinChina,butthereisjustifieddoubtthatonechildcanbeartheburdenofmaintainingtwoagingparents
(Modigliani&Cao,2004,p.165).
TheLCHalsoaccountsforthesecondreasonforhighChinesesavings–incomegrowth.TheLCH
arguesthatsavingsarenotdependentonGDPpercapita,butratherGDPgrowth.Asfigure2
demonstrates,Chinesehouseholdsavingsratiosarehighlycorrelatedtoincomegrowthovertime.
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Figure2-Source:ModiglianiandCao,"TheChineseSavingPuzzleandtheLife-CycleHypothesis"
Additionally,thepost-1978reformsintroducedagreaterdegreeofuncertaintyforChineseworkers,
becauseofthedisappearanceofguaranteedemploymentandsocialservices.The“breakingoftheiron
ricebowl”incentivizes“precautionary”savingsasaprotectionagainstanuncertainfutureemployment
outlook(Chamon&Prasad,June2008,p.5).
Anothermotivationforsavingsliesinthecertainfutureneedtofundeducationandhealthcare
expenses.Becauseof,“theuncertaintyandlumpinessofthoseexpenditures,”householdsseekasavings
cushion(Chamon&Prasad,June2008,p.15).InChamonandPrasad’ssample,“thefractionof
households…forwhichhealthexpendituresexceed20percentoftotalconsumptionexpenditures…has
risenfrom1percentin1995to7percentin2005”(Chamon&Prasad,June2008,p.15).Inthepre-1978
economy,thestatewasresponsibleforhealthandeducationexpenses.
Lastly,thefinancialsectorhasyettodevelopaconsumercreditmarket.Asaresult,insteadof
borrowingtofinancelargepurchases,“Chinesehouseholdsaremorelikelytorelyontheirsavings”
(Chamon&Prasad,June2008,p.15).In2005,Chineseconsumercreditstoodatabout17%ofGDP,
whichissimilartootherdevelopingcountries,butmuchlowerthanthedevelopedworld(Kuijs,Howwill
China'sInvestment-SavingsBalanceEvolve?,2006,p.9).Becauseconsumerscannoteasilyaccesscredit
forlargepurchases,theymustaccumulatesavingsovertimetopaythefullpurchasepriceincashup
front.Thisresultsinlargerbankdepositsforlongerperiodsassavingsaccumulate.
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III.TheBestofWhat’sAround:ChineseSavingsChoicesGivenPresentOptions
a.BankDeposits
Asof2006,over90%ofChinesenetfinancialinvestmentwasinsavingsdeposits(Kuijs,Howwill
China'sInvestment-SavingsBalanceEvolve?,2006,p.7).Thecentralgovernmentmaintainsaceilingon
interestratespaidonsavingsdeposits,aswellasaflooronloaninterestrates,toensurebankshavea
healthyprofitmargin.Asaresult,mostChinesesaversearnzeroornegativereturnsonsavingsdeposits
afterinflation(Wu,2005,p.221).Theartificiallylowreturnsaversreceiveondemanddepositsforms
thefoundationofNicholasLardy’sdefinitionoffinancialrepression.Henotesthatin2002,thePeople’s
BankofChina(PBOC),“fixedthemaximuminterestratebankscouldpayondemanddepositsat
0.72percent,aratethatremainsunchanged.Butinflation,asmeasuredbytheconsumerpriceindex,
tickedupbyalmost9percentagepoints,”fromthatpoint,makingtherealreturnonbanksavings
depositscloseto-7.28%(Lardy,2008).
b.Equities
Beyondbankdeposits,otheravailableavenuesforsavingsincluderealestate,Chineseequities,
andtoamuchmorelimitedextent,insurance.Chineseallacrossthecountrytradeinequities,butare
limitedtoonlythosesharestradedinthedomesticmarkets.Desireforbetterreturnsoverbank
depositsandthelargenumberofunsophisticatedinvestorsinChinaleadsto“extremepricevolatility,”
intheformsofbubblesandbursts(Lardy,2008).
Figure3-ShanghaiCompositeIndex2000-2009
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Figure4-ShanghaiCompositeIndex,1992-2009
Lookingforward,“thereislittledoubtthatChina’sstockmarket,inspiteoftheNovember2007
marketcorrection,remainsinbubbleterritory”(Bottelier,TheEvolutionofBankingandFinanceinChina
-DomesticandInternationalAspects,2007,p.8).TherisksassociatedwithovervaluedChineseequities,though,areuncertain.Ontheonehand,“buyingonmarginis officiallyprohibited(andbelievedtobe
rare)inChina,”whichreducessystemicriskintheeventoffurthercollapse.However,Bottelier
estimatesthatover60millionhouseholdsownstock,soanysignificantpricedeclinecouldhurt
householdbalancesheets(Bottelier,TheEvolutionofBankingandFinanceinChina-Domesticand
InternationalAspects,2007,p.8).Asthefiguresabovehighlight,theChineseequitiesmarketsare
subjecttohugeswingsovershortperiods,whichnodoubthasdeleteriouseffectsformanyhouseholds.
c.RealEstate
WhenChinaimplementedthereformandopeningpolicy(gaigekaifangzhengce)inthelate1970s,netaveragelivingspacepercapitainChinawasroughly4%ofU.S.levelsin2001(Gibson,2009,
p.3).Despiteaddingvastamountsofnewhousingfrom1949-1978,thedemandforresidentialspacefar
outpacedsupply.Partofthereasonforthisdisequilibriumlayinthefactthatstate-ownedenterprises
(SOEs)wereresponsibleforprovidinghousingforemployees,andtheyhadlittleincentivetospend
moreonimprovingemployeehousingthannecessary.
WiththeSOEreformsbeguninthelate1980s,enterpriseswerenolongerresponsiblefor
providingsocialbenefitstoemployees,suchashousing,healthcare,schools,etc.,whichhadbeena
tremendousburdenonSOEprofitability(Bottelier,ClassLecture,2009).The1988NationalHousing
ReformPlanmadetheprivatizationofChinesehousinganationalpriority.ThegovernmentinstructedSOEstoselltheirexistinghousingstocktoemployeesatareasonablediscount,asincomeswerestilltoo
lowtoclearthemarketofresidences.Thegovernmentalsoguaranteedtherightofindividualstosell
andbequeathpurchasedpropertiesatthistime.Lastly,rentswereincreasedsharplytomakeresidential
ownershipmoreattractive.NeilGibsonaptlyphrasesthegovernment’sattitude,writing,“Whetherthe
Chinesepeoplelikeditornot,theyweregoingtobetherecipientofasignificanttransferofwealth”
(Gibson,2009,p.6).
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Unfortunately,inrecentyearsrealestatehasbeensubjecttoitsownbubble.Withtheapproval
oftheGuaranteeLawin1996,householdscouldusetheirapartmentsascollateralformortgagestobuy
newer,biggerapartments.Theoriginalapartmentwouldoftenbekeptasarentalproperty(Gibson,
2009,pp.10-11).Thistrendresultedincascadingdemand,creatingaspeculativehousingbubble.
Everyonefromschoolteacherstocabdriversfelttheycouldplaypart-timelandlord(ChenK.,2004).
SOEsthemselvesbegantoinvestinlandastheysoughtadestinationforretainedearningsinexcessof
profitableinvestmentopportunities(Gibson,2009,p.15).Fearfulofarealestatecollapsesimilartothe
Japan’sintheearly1990s,theChinesegovernmentdeliberatelyprickedtherealestatebubbleinearly
2007.Thecentralgovernmentimplementednewrestrictionsonaccesstomortgages,andthebuilding
communityrespondedbyslowinggrowth(Bottelier,ClassLecture,2008).Thoughchoosingtoprickthe
realestatebubblerepresentedsoundeconomicpolicy,itarrivedjustbeforetheglobaleconomywas
dueforcollapsewiththeonsetoftheU.S.subprimemortgagecrisis.
c.Insurance
InsurancecontinuestogrowatexponentialratesinChina,butpenetrationremainsquitelow.OnlyonepercentofGDPinChinaisspentoninsuranceyearly(Lloyd's,2007).The2007
PricewaterhouseCoopersupdateonthestateofforeigninsurancecompaniesinChinafoundthat,
“althoughtheinsurancemarketasawholeisbeginningtomature,theindividualconsumerdoesnot
seemconvincedaboutwhythereisaneedforinsurance.Considerableeffortsonawarenessbuilding
andeducationarerequired”(PricewaterhouseCoopers,2007,p.15).Untilconsumersthemselvesare
convincedoftheneedforinsurance,itwillremainanunderdevelopedavenueforpersonalsavings.
IV.StepstowardaBetterTomorrow:PolicyInitiativestoAchieveGreaterUtilityforSavers
InLampton’s1998ForeignPolicyarticlecitedabove,heasks,“WillBeijingrecapitalizeitsbanks
andoperatethemonsoundfinancialprinciples?...AndwillChinatackletheproblemofstate
enterprises…whosebaddebtstothebanksaretheprincipalcauseofthe…system’scurrentwoes?...Can
Chinameetthesechallengesandavoidseriouspoliticaldislocation?Nobodycanbesure”(Lampton,
1998,p.19).Elevenyearslater,weknowtheanswer:ChinacananddidreformthebanksandSOEswith
greatsuccessandwithout“seriouspoliticaldislocation.”Incomparisontotheveryseriousanddifficult
taskofrecapitalizingthebanksandreformingscleroticSOEs,reformingtheretailsavingssystemis
relativelyeasy,asretailsaverscanbecountedontorespondtotheincentiveswithwhichtheyare
presented.
a.ExpandingHealthInsurance
Usingcross-sectionalmicroeconomicdata,ChamonandPrasadargue,“thattheeliminationof
theriskofhealthexpendituresexceeding20percentofincome(throughacatastrophicinsurance
scheme)wouldhaveloweredthemediansavingratein2005by3.5percentagepoints”(Chamon&
Prasad,June2008,p.25).Indeed,theiranalysisfinds,“Theincreasingprivateburdenofeducationand
healthexpendituresseemsoneofthestrongestcandidatesforexplainingtheincreaseinsavingrates”
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(Chamon&Prasad,June2008,p.25).Insteadofeachhouseholdsavingenoughtocovermassive
medicalexpenses,significantwelfaregainsmaybeobtainedfromtheimplementationofsocialhealth
insuranceprogrammesbyimprovingrisk-sharingmechanismsandbyallocatingtheresourcesof
householdsmoreefficientlyovertime”(Chou,Liu,&Huang,2004,p.295).Asacomparisonwitha
similarlyhighsavingssociety,theintroductionof“NationalHealthInsurancereducedsavingbyan
averageof8.6–13.7%”inTaiwan(Chou,Liu,&Hammitt,2003).
Recognizingtheabilityofhealthinsurancetostimulatespendingandtheneedtoboost
consumptioninruralareas,theChinesegovernmentannouncedinJanuary2009thatitwillspendover
US$120billionoverthreeyearstoboosthealthcareinfrastructureandexpandhealthinsurancecoverage
(Fairclough,2009).Thoughtheplandoesincludesomefundstosubsidizeinsurancepremiums,thereis
stillampleroomtoencouragethecreationoflow-costprivatehealthinsuranceschemescoveringonly
catastrophicaccidentsandillnesses.Forexample,accordingtotheNationalDevelopmentandReform
Commissionpolicyreleaseof6March2009,only150billionRMBwastobeallocatedtothebroad
categoryof“medicaltreatment,publichealth,education,cultural,andsocietaldevelopmentprojects”
(PRCNationalDevelopmentandReformCommission,2009).
b.LegitimizingUndergroundFinance
InhergroundbreakingstudyofundergroundfinanceinChina,Prof.KelleeTsaiwrote,“Asofthe
endof2000,lessthan1percent ofloansfromtheentirenationalbankingsystemhadgonetothe
privatesector.Businessownerstaketheirexclusionfromformalsourcesofcreditforgranted…howhas
China's'economicmiracle'beenfinanced?Theshortanswer:informal,andoftenillegal,finance”(Tsai,
2002,pp.2-3).WithinChina,thereareamultitudeofinformal,unregulatedsourcesofcreditforsmall
andmediumsizedbusinesses,rangingfrominterpersonallendingtofullundergroundbanks.Lardy
quotesthesumofinformalloansoutstandingat,“RMB10trillion,equivalenttoalmostathirdofthe
loansextendedthroughthebankingsystem”(Lardy,2008,p.5).
Ifpresentlyillegalsourcesofcreditcouldbelegalizedandregulated,China’ssavingswould
declinefortworeasons.First,saverswouldbeabletoearnmorecompetitivereturnsondepositsat
theseinstitutions.Second,theselenderswouldprovideexactlythesortofflexibleaccesstocreditthat
wouldmakeprecautionarysavingsunnecessary.Forexample,ifsavershadtheoptiontotaptheequity
intheirhomes,saverswouldnotneedtokeeplargedepositsofliquidassetsasahedgeagainstmajor
expenses.Theselendinghouseswouldalsocontinuetoprovidefinancingandcreditforgoods
purchases,obviatingtheneedtoholdcashtocoveranydurablegoodspurchase.
c.ObstaclestoProposedReforms
Asstalledreformsdemonstratetimeandagain,thesensibilityofareformprojectcarrieslittle
weightifconcurrentpolitical-economicconcernslieinopposition.Asnotedabove,theprospectof
increasingretailsavers’savingsoptionsholdsgreatpromiseforsolvingseveralofChina’spressing
economicissuesandraisingutilityforsocietyasawhole.Understandingtheconcernsofentrenched
interestspreventingpositivechangeprovidesausefulframeworkformovingtowardsreform.
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Contrarytopopularbelief,thekeybeneficiaryofthetightsavingscontrolsinChinaisthe
government.Lardyarguesthatwhilegovernmentceilingsoninterestratespaidondepositsandfloors
onloaninterestratesguaranteesacomfortableoperatingmarginforbanks,muchofthatbenefitis
erodedbygovernmentpolicieswhichforcebankstoholdcentralbankbills.Tomaintainthestabilityof
theYuanagainstforeigncurrencies,thePBOChasintervenedsignificantlyintheforeignexchange
markets.TopreventinflationaryeffectsfromtheintroductionofYuan,China’scentralbanksterilizes
muchofthenewYuanissuesbysellingcentralbankbillstotheChinesebanks.Thesecentralbankbills
payverylowinterest,andarethereforeanimplicittaxonbanks.Furthermore,since2007,thecentral
bankhasincreasedthereserveratiobanksarerequiredtoholdtofurtherreducethemoneysupply.The
opportunitycostofthisovercapitalizationofChinesebanksisanotherimplicittaxonbanks.Lardy
estimatesthatthecostoftheseimplicittaxesforbanksin2007was230billionRMB(Lardy,2008,p.3).
FinancialrepressionisakeytooltoensurethatcentralbanknotescanbeplacedwiththeChinesebanks
forsterilizationpurposes.Anyattempttoreformandliberalizesavingsoptions,therefore,mustbe
concomitantwithreformofChina’sexchangeratepolicy.
V.FortheFirm,theLion’sShare:Macro-LevelFinancialChangesandtheRetailSaversTheyForgot
ThoughtheChinesefinancialsystemhasmadegreatstridesinjustafewshortdecadestowards
integratingwiththeworldeconomy,theChineseleadershipfavorsstabilityoverthechancefor
improvedgrowth.Despiteinstitutionalreluctance,Chinahasachievedsignificantchangesinthenature
andoperationofitsfinancialsystem.ThoughessentialforandakeycontributortoChina’s
unprecedentedgrowth,thesemacrolevelchangeshavefailedtoimprovetheretailsavers’financial
libertytothesamedegreethattheyhaveopenedtheoperatingspaceoffinancialfirms.
InUnderstandingandInterpretingChineseEconomicReform,JinglianWunotesinasingle
paragraphthetremendouschangesfacingthefinancialsectorastheeffectsofthe1978reformsbegan
toplayoutinthefinancialmarketplace.In1981,theMinistryofFinancelegalizedbondissues.From
1980-1985,Chinawitnessedtheemergenceofcommercialpaper.In1986,thePBOCbegantoallow
financialinstitutionstotradeassets.In1987and1988,Chinaestablishedsecondarymarketsforbond
trading.By1990-1991,ChinahadtwofullyfunctioningstockmarketsinShenzhenandShanghai(Wu,
2005,pp.219-220).Inasingledecade,thecentralgovernmentoversawthecreationofadomestic
financialsystem.Asabenchmark,onecouldnotethattheprivatesectorwasonlyformallyrecognizedin
theconstitutionalamendmentsof2001(Steinfeld,2002,p.384).
China’sprocessoffirm-levelfinancialopeninghascontinuedasChinapreparedtoenterthe
WTOandinthefulfillmentofWTOcommitmentsthroughoutthe2000s.FinancialsectorreforminChina
enjoyedthedubioushonorofanareatheChinesegovernmentseemedintentonprotectingfrom
foreigncompetition.Writingin2001,JohnLangloisnotedin TheChinaQuarterly ,“Thefinancialsector
provisionsoftheagreementsprovideforsignificantpointsofentrytotheChinesemarketsbyforeign
participants.Buttheyembodyprotectionistprinciples…Chinaevidencesareluctancetopermitforeign
competitioninthefinancialsector”(Langlois,2001,p.610).Langloisattributesthisreluctancetoa
desirebytheChinesegovernmenttoholdontothereignsofcapitalforpoliticalreasons(Langlois,2001,
p.611).
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Despitethegovernment’saversiontofinancialsectorliberalization,thetermsofChina’sWTO
accessionincluded(1)liftinggeographicalrestrictionsforwherefinancialfirmscouldoperate;(2)
allowingforeignfinancialfirmstocompeteforChineseclients;and(3)easethelicensingrequirements
forbanksandfinancialinstitutions.By2006,however,foreignfinancialplayersheldonly2%ofthe
domesticChinesemarketandfacedsignificantobstacleswhentryingtoopennewbranches(Moody's
InvestorsService,2006).Despitethesedrawbacks,a2007industrysurveybyPricewaterhouseCoopers
foundthatmostforeignbanksoperatinginChinahadstrongintentionstostayandfurtherintegrate
withandparticipateintheChinesedomesticmarket(PricewaterhouseCoopers,2007).
WhilelargecompaniesandmajorfinancialplayersareoperatinginChinawithincreasing
freedomandenjoyingawiderrangeofdebtandequityfinancing,theretailsaverfacesthesamechoices
availabletoChinesesaversforcenturies.Besidesbankdeposits,equityholdings,andrealestate,which
werefinancialoptionsavailabletoChinesepre-1949,therehasbeenlittlemovement.Indeed,asProf.
Tsainotes,themainsourceoffinanceformostSMEscomesfromunderground,non-sanctioned,largely
unregulatedfinancialinstitutions.Indeed,foreignersobservingChinesesocietyintheearly20th
century
notedtheexistenceofcreditcooperativesandlocalfinancialorganizationsestablishedforbusinessoragriculturalfinancing(Mallory,1931,p.492).Themethodsofpaymentandpracticeswerewell
established,andbolsteredbyofficiallegalobligations,collateral,andasystemofguarantors(Gamble,
1944,p.46).Mostinterestingisthatthesesystemsofsharedsavingsandcreditcontinuedtoexistin
somecapacityevenaftertheestablishmentofthePRCandwellintoMao’stenureasparamountleader
(Jones,1967).
VI.Conclusion
Avenuesforretailsavingshavefailedtoreapthebenefitsoffinancialmodernizationinother
areasofChina’seconomy.Thebenefitsofpooledrisks,consumercredit,andthemyriadfinancial
combinationsthatretailsaversandindividualconsumersenjoyinothersocietiesremaindeniedto
mainlandChinese.Incontrast,theconcertedlobbyingofinternationalfinancialactorsandforeign
governmentshavebroughtsignificantchangeandincreasingopennessintheparticipationofforeign
firmsandliberalizationofChina’sfinancialmarkets.ThoughSec.Paulson’scommentthat“Inadequate
rewardtosavingshurtstheChinesepeople”remainsclear,whatremainsunclearisthetimeframe
withinwhichretailsaversinChinacanexpectchangeandincreasedliberty.Giventhatexpandingthe
Chineseretailsaver’sportfolioofoptionsholdsgreatpromiseforaddressingoutstandingeconomicand
financialconcerns,onecanonlyhopethathorizonisnear.
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