Washington, DC: International Monetary Fund, 2013. xiii, 229 pp. (Figures, tables.) US$38.00, paper. ISBN 978-1-61635-406-0.
China’s Road to Greater Financial Stability examines China’s financial institutions and policies in order to establish what risks or returns they present to financial stability. The book is well organized, addressing the different facets of China’s financial system in depth and without much overlap, and easy to read, written in clear language with a strong structure. The content is drawn out expertly, but there are two aspects missing that limit the usefulness of this manuscript. First, there is very little written about shadow banking, which is mentioned, but dismissed as a small component of the financial system. In fact, shadow banking, or non-bank loan finance, is equivalent to 30 percent of China’s bank assets (and over 50 percent of GDP) and has posed increasing risks to financial stability. Second, there is no economic or financial theory used in the text. In particular, there is no discussion of theories of financial stability and development, which vary in their assumptions and conclusions about what comprises a stable, deepening financial system.
Shadow banking has posed a large threat to China’s financial stability in recent years and therefore is one of the most relevant topics to the subject of this book. The excessive risks taken in the trust sector have been carried through to banks’ wealth management products. Risks taken by credit guarantee companies and Internet lending companies have resulted in the failure of these companies. Regulatory responses to problems in the shadow banking sector have been multiple.
Financial stability and financial development theory have changed dramatically over the past several decades. They have moved away from assumptions that financial liberalization is always beneficial for an economy and toward assumptions that countries should take a cautious approach to liberalization. Current theoretical assumptions are embodied in the policy advice presented in the volume but an explicit statement of those assumptions is omitted, which may lead to confusion. For example, various chapters in the volume state that a) finance can destabilize growth; b) that finance can become predatory in open economies; or c) that financial liberalization, including exchange rate and interest rate liberalization, is necessary to enhance growth in China. These assumptions are seemingly contradictory, but can be resolved by drawing out the theoretical underpinnings associated with them. It is probable that financial stability and financial development theory will once again change, and the assumptions implied in this volume will no longer be so evident.
Despite these gaps, the volume provides a great deal of valuable information on China’s financial system and can be used as a reference on the most relevant financial institutions and policies present in the country today. Some highlights of the book include chapter 4 by Yang Li and Xiaojing Zhang, on China’s sovereign balance sheet risks, which provides an interesting analysis of sovereign assets and liabilities and the potential financial risks associated with these; chapter 5 by Nuno Cassola and Nathan Porter, on systemic liquidity and monetary policy, which analyzes how the policies of the People’s Bank of China impact liquidity and financial prices; chapter 7 by Silvia Iorgova and Yinqiu Lu, on the structure of the banking system, which besides examining the banking system, contains a brief discussion of the relationship between banks and local governments; and chapter 11 by Shuqing Guo, on China’s capital markets, which describes China’s stock and bond markets and discusses the reform measures that have been implemented. Li and Zhang’s look at the sovereign balance sheet is an important and often overlooked component of assessing financial stability. The authors find that the possibility of a sovereign debt crisis is low, since the state has built up sufficient equity. Cassola and Porter incorporate useful figures on interest rates, bond spreads and measures of structural liquidity to discuss potential liquidity shocks due to uneven distribution of liquidity, even when overall liquidity in the system is sufficient. Iorgova and Lu deconstruct the components of the banking sector and include a brief section on the shadow banking system as well as a look at the debt burden that local government financial platforms have placed on banks. Guo’s chapter on capital markets contains useful figures on capital market structures and financial assets, and a helpful table that lists a number of reforms that are implemented or being considered and how they are being put into practice.
The book is written in a clear style by reputable contributors, and is accessible to scholars, policy makers and financial analysts who seek a clear snapshot of China’s financial system. The book is also well priced: at USD $38.00, the book can provide a useful resource for any library. The work is timely, as financial stability in China is a topic that has grown increasingly complex and of concern. An updated version of this volume that takes into account the shadow banking sector, financial stability and deepening theory, and the new financial reforms due to be implemented this year would be most welcome. As it stands, we recommend this book to those interested in China’s financial system.
Sara Hsu
State University of New York at New Paltz, New Paltz, USA