Financial markets in emerging markets need careful sequencing in reforms: recent developments suggest that the Mainland authorities well understand this point.
It is encouraging to see the practical steps being taken over the years by the authorities on the Mainland of China in the development of financial markets there. This is crucial to the modernisation of China's economy. By creating efficient financial markets to facilitate financial intermediation -- by channelling savings into productive investments -- the authorities will enable money to work better for the community, and will therefore promote economic development more effectively. Although not a lot of money is saved under mattresses nowadays, the savings rate on the Mainland is among the highest in the world. Yet these savings are not exactly well mobilised for the Mainland's economic development. There is a need for continued and intensified efforts to develop diversified channels for this basic purpose: this is something that those responsible for financial market development should always bear in mind.
We have seen how in other jurisdictions that all too often this basic role of financial markets has been overlooked, where authorities responsible for financial sector development have simply tried blindly to replicate whatever arrangements have been in the developed economies. Even before such basic issues in market development as liquidity, disclosure and the efficiency of the market infrastructure, had been adequately addressed, fancy derivative products proliferated. Financial markets assumed a life of their own, ignorant of the basic role they were supposed to perform, and were turned more into a playground for punters than a channel for financial intermediation. As a result, the price signals became highly distorted and the likely outcome, when there was a significant shock, was market meltdown and financial repression. This phenomenon was, at least in part, the result of the promotional efforts of market practitioners keen to develop their businesses. Where appropriate, the authorities should be careful not to inadvertently allow financial markets "to learn to run before they learn to walk". The level of sophistication of financial markets should not get ahead of that of the market participants.
Conversely, we have also seen financial market development often inhibited by those with vested interests and in a position to exert influence. Even in the most advanced financial centres, this phenomenon has been a common feature, manifesting itself in cartels that limited competition and in an unhealthy degree of market concentration. Financial markets have sometimes been run, not to facilitate financial intermediation, but in the best interests of the intermediaries. There have also been those who have derived much benefit from market inefficiency and are loath to see efforts aimed at making markets work better. Just as in the case of allowing a financial market to assume a life of its own, the consequence of allowing vested interests to dictate the development of financial markets could again be weak markets that are prone to crisis and financial repression.
It is heartening to see the Mainland regulatory authorities being mindful of the basic role of financial markets in their efforts to develop them. The removal of restrictions on local investors in participating in the B-share market, hitherto open only to foreigners, is a good example. If it is desirable to allow companies to raise foreign currency funds through the listing of B-shares, and it clearly is, it should not matter whether those funds are owned by local investors or by foreign investors. Restrictions on market access lead to market fragmentation, which in turn undermines market liquidity and the ability of the market to provide the reliable price signals that are crucial to the long-term success and credibility of that market.
Ideally, and I hope this is a matter that will be addressed sooner rather than later, there should really not be different markets, and therefore different prices, for channelling savings in different currencies into productive investments undertaken by the same listed companies. The longer-term goal must be the creation of a unified, global market that allows trading round the clock in the same shares, with arrangements for different currency denominations, translated from the price of the shares in the domestic currency, for the convenience of investors operating in overseas markets. But it is recognised that, for as long as there continue to be restrictions in the convertibility of the domestic currency, this market fragmentation will remain.
Joseph Yam
1 March 2001
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