Beijing Briefs

China held the attention of bankers and financiers around the world this week at a meeting of the International Institute of Finance in Beijing June 10-12. Most of the world’s financial power brokers gathered to discuss how a new global financial architecture would look, and China figured prominently. The meeting appeared to be strongly supported by the country’s elite.

What was behind the fancy talk about challenging old financial sector paradigms and giving a voice to emerging markets which members were told was a major theme? The answer appeared to be the stark realization by everyone there that global markets have to be stabilized and the unspoken fact that Chinese banks must play a major role in sustaining economic growth. Also unspoken was the fact that such a major role would not likely be played by China without a great deal of diplomatic and political give and take on the part of individual nations.

A time for reassessment

“Financial institutions live globally but die nationally,” explained Philipp Hildebrand, Vice-Chairman of the Swiss National Bank, pointing out that the Financial Stability Board, a global body tasked with monitoring national policies, must leverage off of domestic policies.

But what needs to be done in the short term is exactly the opposite of what should be done in the long term, warned financier George Soros, Chairman of Soros Fund Management, a private institution that by all accounts seems to have come through the recent financial crash unscathed.

In the short term governments must replace credit, which will increase national debt, but in the long run government needs to remove itself. Soros called for an immediate redefining of market risk and an end to credit default swaps which he called “instruments of destruction.” According to Soros, markets are imperfect, regulators are even more so, and therefore regulators should be kept in line. His final message and the last note of the meeting was this: markets are global, global regulators must monitor them.

That the financial sector must be re-defined was a point also made by Sir Deryck C. Maughan, Managing Director and Chairman Asia of Kolhberg Kravis Roberts & Co. Maughan urged a new definition of banking to include less leverage, more capital and lower returns. While the party was fun, he said, it is now over and the “social contract is about to be rewritten” soberly adding that “the way forward requires a much more rigorous business model.”

Jacob Frenkel, Vice Chairman of American International Group, was frank in highlighting the amnesia that was characteristic of the banking sector until the very last moments before the crash. Like so many at the conference, he belatedly emphasized that sustained growth could not be achieved without sound macroeconomic policies. He also pointed out the success of China’s focus on domestic infrastructure growth, but left audience members somewhat confused with his contention that a new paradigm was not the solution, “we are on a detour from the old paradigm.”

China rising?

The ‘old paradigm’ did not include much of emerging markets, a point acknowledged by Terrence Checki, Executive Vice President of Emerging Markets and International Affairs at the Federal Reserve Bank of New York. He pointed out global adjustments need to be made to accommodate emerging Asian markets that are taking on a greater role in globally. This will require some to spend more and others to save, he said.

Much of the focus of the conference was naturally on China’s emergence as financial powerhouse. Stephen Roach, Chairman of Morgan Stanley Asia, was blunt about China’s approach so far. “Asia needs a new growth model,” he said. “We are at a critical juncture” and while China may be taking a proactive domestic approach while waiting out the crisis, it still has a long way to go. Roach recalled Chinese Premier Wen Jiabao’s announcement in 2007 that China’s macro conditions were “unstable, unbalanced, uncoordinated, and unsustainable.”

Bank of China’s Vice President Zhu Min did not specifically counter Roach’s argument. But he strongly affirmed China’s current successful macro policies and massive amounts of stimulus being pumped into infrastructure expansion and social services. This he pointed out this means China’s confidence is high and the economy is growing strong.

Perhaps outlining the starting point for a new Asian financial paradigm, China Banking Regulatory Commission Chairman Lui Mingkang said the key to China’s development will be the “scientific development” of capital markets. He was blunt in rebuffing earlier arguments by some attendees that the world is merely on a detour and will likely return to the old financial blueprint. The current global response to the crisis has not been enough, he told the conference - a new road map must be drawn up.

What was unclear was whether China expected the high powered listeners to be involved in designing the new map or if China already has a new map ready for unveiling.