Don’t Expect Miracles From China’s Regulators
The ever-trusting bull investors have replaced Aladdin’s genie with China’s regulators. But frankly, they don’t have the magic to avert every crisis in this emerging market. Reuters‘ Jon Gordon gets the skinny from Breakingviews‘ Peter Thal Larsen on what investors should beware of…
The Almighty Regulators
Jon Gordon says: “As reform fever takes hold in China, somehow it’s almost as if the markets put Chinese regulators on a pedestal here Peter, as all-knowing savants, but you take issue with that.”
Peter Thal Larsen says: “Yeah I think this is one of the big debates about China. Almost sometimes it resembles almost a debate about whether or not God exists. Some people basically say, ‘China has lots of problems, but the regulators can always sort it out, the authorities can always keep the system under control.’ Other people question that. And we think, really, this idea of the omniscient regulator in China has got to go, this myth has got to be busted.”
Jon Gordon says: “And are you saying that they’re not smart enough to handle their jobs? What is missing here?”
Peter Thal Larsen says: “Well, I think they’re clearly, undoubtedly, smart people. But I think what you have to be aware of, is that the regulators are operating under a series of constraints. First of all, they inherited a system that actually they didn’t design. You know, kind of, financial repression, low deposit rates, which then prompts people into other kinds of investments and into shadow banking.
“They have a limited number of tools to deal with that. And they’re also operating under broader constraints, which is that the politicians, the people who lead China, basically want to keep growth on the road. So any financial reform has to be designed so that it doesn’t affect growth too much.”
A Shaky Belief System
Jon Gordon says: “Alright, can we count on these guys to avert a crisis though, given what’s arguably a pretty fragile period of time for China in this transition for the economy?”
Peter Thal Larsen says: “Well I think the first thing you’ve got to say is that they’ve done pretty well so far, and although there are reports of squabbles between the China Banking Regulatory Commission and the People’s Bank of China, regulators always squabble.
“They squabble in the West, as well. So, I think it doesn’t necessarily mean there is going to be a China. But I think that belief that somehow the authorities are all sitting in a room, are all in complete agreement of what to do and can avoid any problem. That belief has got to be challenged.”
A nice touch of realism from Peter – one that’ll hopefully balance the rose-colored glasses that many are wearing.