Daily Archives: January 21, 2008

China’s financial fragility is a political issue

I have predicted in the last year that China will face either a social or a financial crisis that threatens the regime sometime in the next few years. This piece by the prescient Minxin Pei and a colleague from the Carnegie Endowment for International Peace (where I spent a semester working on terrorism issues a while back) makes the important point that a financial crisis could trigger a political crisis.

They write:

...when it comes, a Chinese stock market crash will produce serious political consequences. Official figures show that more than 100m people have invested in equities, mostly during the recent bull market run. A massive sell-off will hit their household net worth. Because the Chinese government has been perceived as an active promoter of the country’s stock market, tens of millions of individual investors, members of the privileged urban middle-class, will direct their ire at the government. To make matters worse, most publicly listed companies are state-owned, so investors assume that the state is liable for the collapse of their share prices.

Of course their suggestion that reform from above can lead to a stronger capital market regime in China is misguided: the regime does not have that kind of dynamic built within it – it cannot allow a genuinely independent western-style capitalist class to emerge.

To regulate or not? That is THE question

Our friends over at naked capitalism brought this opinion piece from the FT to our attention. It is by the best known securities law professor in the country, John Coffee at Columbia Law School. He argues persuasively that despite all the post Sarbanes-Oxley panic, the US capital markets remain the most attractive around the globe. My view of this is pretty simple: in no other country do investors stand as good a chance at enforcing their legal rights than in the US. And investors continue to be willing to pay a “Rule of Law” premium to buy stocks here. That suggests the deregulation mantra sung by so many in the last few years ought to be softened considerably. With several seats open on the SEC perhaps it is time to elevate someone to that critical body who actually believes in what the SEC does!

FT.com ‘Regulation-lite’ belongs to a different age