MercoPress. South Atlantic News Agency

Beijing bankers fear the impact on China of financial crisis

Hot debates about the evolving, if not worsening, global financial crisis offer much needed food for thought as China's financial development enters a new era, but few disagree on the need of further financial reforms, according to a leading Chinese banker.

"Of all financial crises, this may be the one that affects China the most" admitted Tang Shuangning, chairman of China Everbright Bank, addressing a finance forum in Beijing earlier this week. China holds the largest international reserves, over 1.8 trillion US dollars and is relatively well positioned to weather the financial crisis. However the impact it may exert upon the Chinese economy remains huge said Tang. According to Tang negative consequences may include a crashing stock market, loss of overseas investment, declining exports, economic slowdown, rising unemployment and a collapse of market confidence. The soundness of the Chinese economy and limited participation in the international financial market have so far saved China from bearing the brunt of the financial crisis. "But we cannot take it lightly" warned Tang. The one-year-old crisis has already resulted in astronomical losses for many established financial giants around the world. The world was particularly shocked over the past few days when Lehman Brothers went bust, Merrill Lynch was absorbed, Goldman Sachs and Morgan Stanley became regulated banks, and AIG was practically nationalized. China has invested heavily in creating an increasingly competitive domestic financial market and improving effective regulation. This has helped the country surface as an emerging financial poser, but a question mark hangs over how global financial liberalization, securitization and integration will influence China's further financial system reform. Many Chinese experts and economists have argued that one of the key lessons to draw from the US subprime crisis was that regulation should be further strengthened. In view of the latest developments in international financial regulation "we should strike a better balance between government regulation and the self-discipline of the financial market" pointed out Gong Minghua, a researcher from China Banking Regulatory Commission. Admittedly, China now boasts the most profitable lending institutions in the world after market-oriented reforms transformed State-owned banks into commercial lenders. However domestic financial market and financial institutions remain unable to meet the country's growing demand for financial services to fuel its economic growth. For example the Chinese government has spearheaded a national campaign to revive the rural economy. But by the end of last year, as much as 7% of villages and towns lacked any financial outlets offering simple, low-cost financial services to boost local economic growth and raise farmers' living standards. Therefore "while emphasizing the importance of market self-discipline, we must overcome such defects in the market with effective regulation" added Gong. Challenging the argument that the current financial crisis is the result of failed regulation, Didier Cossin, a professor of banking and finance from Switzerland's IMD business school participating of the forum, claimed that the crisis is about a culture of greed rather than a lack of regulation. "Nationalization of a triple-A insurance company is more telling than the fall of a leading investment bank like Lehman Brothers. Everyone knows that investment banking is a risky business" said Cossin insisting on the fact that AIG was highly regulated but still failed points to a culture of greed in the financial sector. As to how long the current financial crisis will last, Prof. Cossin did not venture a forecast but warned that the cost of credit will rise. "And the long-term consequence of the crisis may be the end of the free-market way of thinking".