Regulator fears China's boom is a double-edged sword

Modern financial institutions crowd Shanghai's skyline

China's top banking official says that the country's economy needs "rebalancing" after three decades of breakneck growth. Read original article

• China Banking Regulatory Commission
• City of Shanghai government
• HSBC China
• Standard Chartered China
• Shanghai Stock Exchange
• Global Economic Govenance Programme, Oxford University

Liu Mingkang, the head of China's Banking Regulatory Commission (CBRC) says globalisation has become a "double-edged sword" for China.

Mr Liu, who has played a key role in liberalising China's financial sector, was outlining the challenges of globalisation at a seminar at Oxford University's global economic governance programme.

He says that while globalisation is now an inescapable reality, it presents difficulties as well as opportunities for China's economy.

Opening out

There is no doubt that China has become much richer as a result of opening up to the West since 1978.

Shanghai shoppers want Western affluence

Its economy has grown on average by 9.7% per year, while per capita income in urban areas has grown by 6.7% per year, and trade by a robust 12% per year.

The number of people living on less than $1 (50 pence) per day has dropped dramatically.

In the financial sector, Mr Liu has presided over a series of dramatic changes since the Chinese banking sector faced near-meltdown in 2002.

He has allowed Western banks to take shares in China's main commercial banks, allowed them to set up branches in mainland China, and in April agreed that they could compete directly with Chinese banks for retail customers.

Fundamentally unbalanced

Now he seems ready to allow private equity funds to operate in China to improve the efficient working of the capital markets.

But Mr Liu says that that Chinas' dramatic growth has become fundamentally unbalanced, with personal consumption making up less than 50% of Chinese output (the rest comes from exports and investment).

The export drive has created a very large trade surplus, with the Chinese central bank now holding more than $1 trillion in foreign exchange reserves.

This, he says, has created excess liquidity - too much cash - in the economy, which he accepts has helped to fuel a property boom and now a stock market boom.

The spare cash has also led firms to over-invest, so that in many basic industries such as steel and cement there is vast over-capacity.

The answer, in his view, is to boost domestic consumption, but to do that the government has to overcome some deep-seated fears among the population.

He also wants the banks to be tougher in giving out loans to companies, which still raise most of their investment cash from the banking sector.

The Chinese government shares this view and is also concerned about the growing imbalances between rich and poor, and between the coastal cities and the rural interior of the country.

However, so far attempts by the government to slow the investment boom have had only limited success.

Too many savers

Mr Liu is also concerned that Chinese citizens are saving too much and spending too little.

Liu Mingkang wants to liberalise China's financial markets

He argues that the underlying reason for this is the removal of the social safety net that used to exist when China's state-owned firms provided jobs-for-life, pensions, health care and housing for their workers.

Now, according to Mr Liu, the Chinese government spends much less on health and education (as a percentage of GDP) than other countries at a similar level of development, such as India and the Philippines.

He argues that the government needs to increase its spending on social security in order to give people the confidence that the state will still be able to meet many of their future needs and therefore free them to spend more in the present.

He believes that liberalising the financial system, improving the retail banking sector and making it easier to get personal loans and credit cards, could help to spread prosperity.

Talent search

But for China's top regulator, the biggest challenge is to find the talented individuals who will be the next generation of experts and reformers.

Mr Liu says that it is becoming increasingly difficult to recruit highly educated and dedicated people to work in the public sector, as the lure and glamour of the private sector has increased in China.

This is a problem faced by many developing countries.

Mr Liu's generation of technocrats was one of the first to be educated in the West and to be exposed to Western business practices.

Mr Liu, who was head of the Bank of China, the country's second largest bank, worked for three years in London.

But the next generation, including the dozens of Oxford University students from China who turned up to hear Mr Liu, the temptation to stay in the West might prove irresistible.

This is one of a series of articles on how globalisation is transforming China. Future articles will look at the problems of pollution and migrant labour.