Efficient market needs proper regulation
- Source: Global Times
- [00:23 November 09 2009]
- Comments
By Cong Mu
The key to addressing many of the country's economic challenges is developing an efficient financial system, Nomura's economist told a capital market forum in Beijing Friday.
As the economic recovery picks up speed, the four lingering problems to be confronted are avoiding asset price bubbles, economic restructuring, developing the debt market and promoting an efficient financial system, Robert Subbaraman, chief economist in Asia (ex- Japan) for Nomura Securities, told a gathering of domestic and international financiers and Chinese policymakers.
All the challenges need to be addressed together and they carry risks of credit and investment misallocation, Subbaraman said. The key, however, for policymakers is to "keep the financial system very strong, efficient and properly regulated," he said.
A larger corporate bond market can help absorb the inflow of foreign money, recycle the high domestic savings and avoid maturity mismatch by providing long-term liabilities to the banks' long-term loans, Subbaraman told the Global Times on the sidelines of the forum.
However, deregulation of the bond market may exacerbate the competition among banks and security firms and spur reckless lending, as seen in the late 1980s in Japan, thus creating a self-fulfilling asset bubble burst, he warned.
At the end of June, the size of the Chinese corporate bond market was $355 billion, increasing more than 90 percent compared with the same period last year, according to the Asia Bond Monitor report released by the Asian Development Bank in September.
The policymakers need to be careful that regulation has to cover the entire financial system, not only parts, because the unregulated part, such as the investment banks and insurance companies which caused the current financial debacle, will always seek to take riskier loans, the economist said.
As the country shifts to a more consumption-driven economy, banks need to be able to sell their liabilities to the capital market by creating asset-backed securities so that they can make more loans, Brian Baker, CEO of PIMCO Asia, said on the sidelines of the forum.
Meanwhile, China should make sure that the investors know what they are investing in, Simon Linnett, vice chairman of the London-based Rothschild, told the Global Times on the sidelines of the event.
"People have no idea, frankly, what they're investing in," Linnett said when talking about the problems with the asset-backed securities in the developed countries.
Linnett said China should neither emulate the Western financial system nor turn away from what has been done, but it can improve on past experience and do better.
