Sara Hsu
Sara Hsu

Financial analysts Sara Hsu has been predicting doomsday scenario´s for China´s financial stability in the past. But the announced financial reforms have made her carefully optimistic about the direction the country is taking, she writes in the China Brief.

Sara Hsu:

Thus far, the reforms that have been carried out have not had a significant impact on the business community, which has been more focused on events like the U.S. Federal Reserve’s tapering policy and the recent exchange rate depreciation of the RMB against the dollar. The reduction of uncertainty through the announcements of increased financial reform has on average bolstered global stock markets, while expectations on the ground regarding the reform process have been mixed. Some business analysts predict potentially strong and negative short-term impacts of financial reforms, particularly if the reforms are implemented rapidly and create clear losers, with long-term benefits of marketization. Others view the reforms as generally positive in terms of promoting productivity and efficiency among firms. At this point, however, there is no clear, unified reaction to these reforms within the business community.

China has some very large reforms on the agenda that address the very nature of its financial system, correcting fundamental distortions and increasing the presence of market forces. These reforms will affect many aspects of the Chinese financial and real economy, and, although they are positive moves toward more efficient allocation of capital, will have to be watched carefully for unexpected adverse effects. A focus on institutionalizing transparency and reducing related policy biases are essential to the success of these reform processes. Increased rebalancing of the economy toward new sources of profitability, such as consumption-related industries, can result in economic growth that will create an opportunity to reduce government intervention in the economy—but not a guarantee that state enterprises will not find ways to maintain their current standing.

Much is riding on the success of the Xi-Li administration’s reforms. Many elements of this ambitious agenda have been slated for implementation in the coming months, yet, due to the complexity of realizing all of these changes, analysts wait with bated breath to measure their success. One can only hope that technocrats in Beijing are agile enough to respond to unforeseen consequences of their plan.

More in the China Brief.

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