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Howard Davies, former Chairman of the Financial Services  Authority, current Director of the London School of Economics spoke at the LSE last night about where China was up to with its financial reform (download slides here). Davies, a member of the advisory boards of the China Banking Regulatory Commission (since 2003) and the China Securities Regulatory Commission, is ideally placed to talk about reform and the impact of the stimulus.

Davies main tenet: The crisis has meant that China will reform its financial system in its own way and at its own speed. Additionally, the crisis has not derailed the party’s development policies so don’t expect much dramatic change in the model for now.

Key insights:

• The global recession has seen financial reform slow
• China aims for min of approx 6.5% growth rate to maintain its development policies and keep absorbing rural workers -gov target of 8% for this year is reachable
• Whilst the surplus will have decreased, lowering ‘global imbalances’, the effect is modest
• Exports did not drop sharply, rather growth has levelled off
• Stimulus was a quick, not measured response to crisis of global consumer confidence to avoid a compete meltdown of an economy so geared towards exports
• Money went of shovel ready infrastructure projects- good for environmental upgrading – to State Owned Enterprises (SOEs) via central government allocation
• Could/should have spent the stimulus on creating better social safety nets- but gravity of the situation compelled them to rush the money out.
• The Chinese consumer is growing in confidence – based on Mckinsey consumer survey 2009 (below). Mckinsey China consumer survey 2009 parts 1 and 2
• Non-performing loans will rise linked to indiscriminate, and size of, fiscal boost – but no need to fear asset bubbles highlighted by The Economist

For me, what stands out is the reluctance to try and build social safety nets and these are seen as incompatible with boosting (internal) demand.  However, providing more social goods will dampen peoples appetite for hoarding cash for medical expenses etcetc. This paper from the UNDP Poverty Centre 2007 provides more detail on the impact of the Bolsa Familia.

This article from the Carnegie Endowment for International Peace has plenty of data and asks some good questions about sustainability of China’s model:

While maintaining growth is essential for social stability, there is little doubt that China is also serious about industrial restructuring and macroeconomic rebalancing. It seems probable that China will be able to grow at 7–8.5 percent in the next few years and that the share of consumption in GDP will increase.

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