Obstacles to change
Professional worriers in Hong Kong recently worried themselves when the State Council endorsed Shanghai's ambitions to become a financial centre. They need not have been troubled. A closed capital account and concerns about the rule of law remain in the way.
The closed capital account simply means that no one on the mainland can freely convert yuan into another currency and then invest the money abroad. Some people are permitted to do it, of course, but the crucial word here is permitted. Theycannot freely do it.
No place in the world can really be a financial centre unless the people who live there can freely move their money. A financial centre without freedom of finance is like a transport centre without roads, railways or ports. It is a thing that cannot exist. A financial centre must have an open capital account.
This is no small thing. For the mainland, it would mean that anyone in even the remotest farm community, let alone in Shanghai, could walk into a bank with a bundle of yuan notes and exchange them for US dollars. He or she could then freely arrange to wire these dollars to a broker's account in New York with instructions to buy shares of Motorola and pay the dividends to a bank account in Vienna. What is more, no government official or agency would take any interest in this transaction other than ask the bank to report it for the purpose of collecting balance of payment statistics.
The implications are profound. A planned economy cannot co-exist with an open capital account. When capital accounts are opened, financial markets quickly supplant government as the arbiter of where money is invested. If favoured government projects are not commercially viable, then bankers who advance money to these projects will not enjoy sufficient returns to satisfy their depositors, who, with plenty of options now at hand, will move elsewhere.
A government can, of course, always pay for its favoured projects by levying new taxes and can thus continue to evade market disciplines. But what it cannot do in the environment of an open capital account is make itself a special case in the market. It no longer sets the underlying rules. It now has to play by the rules of money. These rules only tolerate play on a level playing field where the referee is every individual member of the population deciding what player he or she likes best. As an example of democracy in action it is even better than the ballot box.
Does the State Council realise this? Do its members really know what they invite when they talk of opening the capital account? Will they really want to go all the way when they finally understand where they are headed?
Opening the capital account is the ultimate reform, the big leap that marks the transition from a centrally planned to a market economy, and it is entirely likely that the authorities in Beijing will shrink from the prospect when they realise what it entails. They will then just revert to the talk they presently employ of gradual steps - the sort of steps that step around a destination rather than towards it. The capital account will then remain closed.
But even an open capital account is not enough to create a financial centre. Financiers must also be confident that any contract they write will have the full protection of the law. If they don't have this in Shanghai, then Shanghai will not be their base.
Shanghai, of course, promises that they will have it, but here is the acid test. Has a judge in any court of law on the mainland ever ruled that an edict from on high, including from the National People's Congress, contravenes the constitution and is invalid? It is only where judges are confident they can make such rulings that confidence in the rule of law can really prevail. This is essential to a financial centre because financiers need the confidence that no pampered pet of a government agency or high-placed official can blithely tear up contracts when events turn adverse. This confidence exists in New York and London and it is a reason that these two are recognised financial centres. It exists in Hong Kong, too. But has a judge on the mainland ever defied a Beijing boss?
At some point in the future it will undoubtedly happen. The mainland's capital account will also be opened at some time in the future. But set your time horizons to a long, long time and a different China from the one you see now.
Jake van der Kamp is a former Post columnist