CHINESE ECONOMY AT A TURNING POINT
The Chinese economy is facing a turning point. Until today, for more than two decades China has functioned as a global production site based on not-expensive, young labor, achieving an annual GDP growth rate of over 10%. This explosive economic growth has dwarfed the issues of the democratization of political systems, income disparity, and environmental destruction. However, when demographic dividend expires, its competitive advantage as a production site will degrade and its economic growth will be decelerated.
From now on, the primary political mission will be to shift to a more stable mature society without falling into the middle income trap under the assumption that growth rate is slightly over 7% or possibly less. If China cannot implement swift, effective measures in response to the deceleration of economic growth, strikes and riots could occur often, economic activities will become sluggish, and this will be the major risk factor for not only for China but also for global politics and economy.
REDESIGN CHINESE FINANCIAL SYSTEM
The key is to redesign the financial systems that deprive citizens of equal opportunities. Especially, it is imperative to strengthen finance for small and medium-sized enterprises (SMEs). The current financial systems in China have two major problems: the excessively biased bank loans for governmental institutions, and government-owned corporations and the huge shadow banking against which there are no effective regulations.
Most of the small and medium-sized entrepreneurs who increase employment and innovation do not recognize banks as an option for receiving a loan and consider shadow banking an undesirable option, because it imposes excessively high interest rates. As a result, there is an uneven distribution of wealth and an inequality of opportunities, which make citizens complain about the unequal society. In addition, the poor financial systems influence the employment at small and medium-sized firms and economic situations, and so the instability of society is augmented significantly from emotional and practical aspects.
What is worse, the huge shadow banking becomes a hotbed of Chinese subprime loan crisis. Such shadow banking includes black-market financing, ROSCA (Rotating Savings and Credit Association), and investment and merchandising through the bulk sale of debts utilizing trust accounts. The actual situations of most of such financial transactions are opaque and so complex that investors and loan suppliers cannot understand them sufficiently. Accordingly, the credit structure in China is beyond the control of regulatory authorities. The shadow banking sector in China is estimated to account for about 30% of the total loan amount, and so a serious systemic risk would be triggered by a financial crisis.
It is essential to develop an effective SME financing market for occupying the missing middle between banks and shadow banking and carry out redesign to achieve transparent, efficient financial systems.