ریاضت اقتصادی و توافق اخلاقی: درسهایی از توسعه سیستم بانکداری چین

China’s state-owned banks have demonstrated a tremendous capacity for change, but their implications for development policy are often unclear. The paper examines why the pre-reform banking system based on moral compromise almost seamlessly changed to one based on self-advancement. Focusing on a period when resources were desperately short, the paper argues that China’s great advantage has been Hong Kong and the safe access to international markets it provided. Consequently China’s leadership is more familiar with international markets than is often assumed, and although capitalism is no longer exceptional, access to formal institutions continues to be a core development priority in achieving modernization.

The importance of good institutions and policies has been highlighted in the literature as decisive for economic development (Olson, 1996). However the question of how and why they matter is often unclear. The puzzle is deepened by large economies such as China which have achieved remarkable growth by following policies that work rather than what is desirable (Qian, 2003). While this approach is useful in explaining policy success, it is less useful in identifying long term development priorities. By focusing on a period of China’s development when resources were scarce and foreign exchange desperately short, this paper argues that important lessons from China’s development, particularly in banking, are to be found in the pre-reform economy. Policies emphasizing integrity, stability, and predictability were key to supplying the PRC with a stable supply of foreign exchange at a time when international blockades meant that foreign exchange was scarce. Shortage meant that exceptional capitalist banking measures could be justified in the national interest, and their benefits were clearly quantifiable in hard currency. After three decades of reform, although capitalism is no longer viewed as exceptional and corruption the incidental albeit lamented price of growth, access to formal institutions continues to be a core priority. The conundrum presented by this paper concerns why the banking system originally followed a system based on idealism and integrity and almost seamlessly changed to one, which by its own admission was beset by corruption. This puzzle is related to broader questions surrounding China’s participation in the global financial system and its measured reaction to one of the worst financial crises in history. The Chinese leadership virtually ignored attempts to lay the blame for the 2007–08 crisis on China’s foreign exchange reserves. Instead their major concern has been the revival of protectionist sentiments in its export markets. The explanation advanced in this paper is that China is far more familiar with the global financial system than is often understood and measured engagement with market capitalism remains a consistent feature of China’s development strategy. China’s banking transition provides a fascinating study of institutional reform. While China’s state-owned banks have demonstrated a tremendous capacity for change, it is not clear whether this seemingly smooth transition was driven by deliberate government policy, changes in global banking or by the dynamics of development itself. Although foreign participation in China’s banking sector remains low, China is now a major participant in global finance in a way that Japan and India have never been. China still needs foreign exchange, but blockades and scarcity have been replaced by extraordinary currency reserves and ample FDI. Maoism and Puritanism gave way to markets and self-advancement. Banking deregulation replaced zero tolerance for capitalism and corruption before the leadership realized the dangers that lay ahead from venality. Banking liberalization also coincided with major changes in global banking in the 1970s, which saw the emergence of large money centre banks, viewed as the optimal formula for sustained business growth and stability before the onset of the current financial crisis. At the same time many of the cadres who led the banking system during the Maoist era were due to retire and their replacements, although well versed in modern banking techniques, did not have the same reputation for probity. Using an evidence-based approach, this paper argues that China’s great advantage has been the location of a sophisticated and open financial center on its doorstep. This advantage could only have been utilized through a pragmatic co-existence between colonial officials and Mainland banks. It is remarkable that this cooperation occurred despite the “cold war” and British military involvement in Malaysia and Korea. It is also remarkable how little change China has made to Hong Kong’s economic and legal institutions post-1997, thereby enabling it to remain an external and separate reforming force. The paper outlines the special set of circumstances that allowed China to accumulate a reservoir of knowledge and experience of pursuing China’s interests in international markets. For pre-reform China, access to the market economy of Hong Kong provided predictability and control. Hong Kong’s attraction was its membership of the sterling area and the access it afforded to convertible sterling. It was also largely free from US attempts to isolate China from international trade and finance. The interface for this relationship was the banking system, in particular the Bank of China and its so-called “sister banks” (also under Beijing’s ownership and control), in Hong Kong. The relationship was coordinated with remarkable efficiency and sensitivity by the banks’ management. It is significant that a majority of this management belonged to the pre-1949 financial elite. Their capitalist origins made them entirely comfortable with international finance and having witnessed how corruption destroyed the pre-1949 regime, they were also sympathetic toward communist ideals. Their expertise and idealism meant that they were ideally positioned to understand the opportunities presented by post-Mao liberalization. Economic reforms after 1978 eliminated many of the systematic differences between China and the outside world, but also blurred the value of good institutions. Although commercial banking is no longer regarded as a moral compromise, the pursuit of modernization through measured engagement with market capitalism remains a consistent feature of China’s development strategy. What changed were the types of behavior permitted. The analysis of a secretive organization such as the Bank of China presents numerous difficulties. To help overcome these, the paper draws on unpublished archival material and statistics. These records provide valuable insight into China’s pre-1978 development and its efforts to overcome serious resource shortages. These records emphasize the importance placed on accessing foreign financial institutions and the willingness of China’s banks to respect the rules imposed by these institutions. Section 2 outlines the unique set of circumstances that allowed China to access external financial institutions. Sections 3 and 4 examine the central role of the banking system, in particular the Bank of China, describing how its operations were based on rationality, integrity, and the informal tolerance of British colonial officials. Section 5 describes how despite the environment of seemingly irreconcilable tension between the Chinese Communist Party (CCP) and the colonial authorities, the Bank was not only comfortable with doing business according to the conventions and laws of colonial Hong Kong, but also using these to China’s advantage. Section 6 discusses the paradoxes that have emerged from banking reforms.

The lessons of China’s pre-reform banking system are that state policies to overcome scarcity, access efficient institutions and mobilize finance matter. Under the pre-1978 economy China’s state banks in Hong Kong represented the interface between market capitalism and communist planning. Remarkably for a communist organization, they operated according to capitalist principles, assuming that practices that were not expressly prohibited by colonial law could be adopted. This created an obvious contradiction with what was happening on the Mainland. Yet, this was tolerated because it was a political necessity. In the face of political hostility and embargos, China’s banking system displayed an extraordinary understanding of the importance of access to efficient institutions. Not only did it use this understanding to help solve serious resource shortages in the 1960s, but it is no coincidence that many of reforms undertaken after 1979 were already pre-empted by PRC banks in Hong Kong during the 1970s. The true advantage of accessing international financial institutions can be seen in their ability to grasp major changes in global banking in the 1970s. Their activities were, therefore, driven by a type of economic dynamism that was driven by development in the global financial system, but had its roots in the drive for socialist modernization. The lessons from this turbulent period emphasize rather than refute the importance of formal financial institutions. Banking reforms meant that such activities were no longer exceptional. They also undermined the moral compromise and sacrifices of the pre-reform era. Their justification was to accelerate growth but they had serious drawbacks. It is perhaps unsurprising then that post-1978 reforms in banking did not lead to the types of improvements envisaged by the leadership. China’s banking institutions have yet to reach international standards. Banks have been shown to be just as susceptible to malpractices as other parts of the economy. The pre-reform system suggested few obvious signals of the problems that were to follow. Foreign investment is still predictable, but is now sourced from foreign direct investment. Its benefits are no longer so easily quantifiable and have become increasingly difficult for Mainland authorities to control. Nevertheless the benefits of accessing formal finance or finding a secure area to do business remains a consistent but underexplored feature of China’s transition as does the extent to which moral hazard has replaced moral compromise in China’s engagement with the international financial system.