PARTICIPANTS
Darrell Duffie, John Cochrane, John Gunn, Bob Hall, Tim Kane, Arvind Krishnamurthy, David Mauler, Monika Piazzesi, George Shultz, Pierre Siklos, John Taylor
ISSUES DISCUSSED
Darrell Duffie, the Dean Witter Distinguished Professor of Finance at Stanford University’s Graduate School of Business, presented his recent research on “Stresses and Strains in China’s Financial System.”
Duffie began by reviewing China’s current financial state on a macro scale. Recent data indicate a decline in GDP growth and sharp rise in debt/GDP. Also noteworthy are extreme levels of corporate debt relative to other countries (state-owned enterprises have a majority of this debt), as well as extreme levels of off-the-books debt by some local governments. China furthermore faces simultaneous challenges of disinflation risk, capital flight, and new levels of foreign exchange uncertainty.
Duffie then noted a general trend of China’s gradual liberalization of “state-directed capitalism.” This is evident by relaxed restrictions on capital flows, increased convertibility of the RMB, lifted restrictions on deposit and lending rates, reduced bailouts, lowered regulatory hurdles to security issuance, and increased reliance on market-based prices. Distinguishing China’s financial system from others’ (particularly the US) is its bank-centric orientation. Its four state controlled banks account for half of all deposits and loans. Secondary equities are active, but corporate bond and derivative markets are in an early stage of development as is the presence of asset management firms. Duffie proceeded to discuss historical developments (with an emphasis on recent events) specific to each facet of this liberalization.
Concluding, Duffie argued that China has enormous untapped potential that calls for a more developed and sophisticated financial system. Encouragingly, China continues in the direction of increased market liberalization, albeit at an extremely cautious pace.
