Remarks by Ahmed M. Saeed, ADB Vice-President, Operations 2, at the opening session of the Boao Forum for Asia Annual Conference, 19 April 2021
Thank you very much.
It's an honor to be with you and I'm looking forward to hearing from others on this stage.
Allow me to make a few key points:
First, the prospects for financial liberalization and reform in China today are perhaps better than they have ever been before. On the supply side, regulators should be emboldened both by the clear success of the most recent wave of financial liberalization reforms initiated in 2018, as well as by the sure-footed way in which they have guided the economy through the very difficult tests posed by the COVID-19 pandemic.
From the perspective of foreign investors China is an even more important opportunity than it was before the crisis. It is the world’s most populous country and largest economy on a PPP basis. Its markets continue to offer both relative value compared to the rest of the world and the prospect of uncorrelated diversification. And, of course, there are absolutely enormous prospects for growth: foreign banks assets are 1/5 the OECD average, and insurance premiums for foreign firms are only 1/10th. It is no surprise foreigners have continued to pile into Chinese markets over the last year, despite market exuberance elsewhere in the world.
Now, what should be the most important reform priorities looking forward? One lesson that ADB clearly took from the experience of Asia in the 80s and 90s is that sequencing matters. It is important to tidy your home before inviting in guests. Another way to say this is that deregulation and reform must precede liberalization and greater openness to external capital flows. So what are the most important deregulatory and reform measures today? Issues in the shadow banking sector are well-known and broadly discussed, as are those associated with NPLs.
Two items that we might add to this list are, first, the potential for issues with household credit. We have seen elsewhere in the world that significant periods of household credit expansion can be followed by sharp market corrections. And China has certainly seen a historically large rise in household credit - up over 4X in last decade to 62% of GDP at the end of 2020.
A second area that I would call your attention to is risks associated with smaller banks: their balance sheet health and their increasing interconnectedness with larger financial institutions. Smaller banks appear to be a larger source of systemic risk than they were in the past and therefore require greater attention than they did in the past.
So far I have talked about financial reform as a way to manage risks. Perhaps I can highlight two areas where financial liberalization can also be a significant agent of positive change: the first is regional integration, something will come back to later in this discussion. And the second is the prospect that China can identify opportunities for leapfrogging other countries rather than simply for coming up to established global standards in key areas. I’ll stop there for now.
Thank you.