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China urged to open up markets

US Treasury Secretary Henry Paulson delivers a speech on Chinese financial market reform in a meeting with financial sector leaders and local government officials at the Shanghai Futures Exchange yesterday. PHOTO: AP

China's path to prosperity lies in opening up its financial sector, US Treasury Secretary Henry Paulson said yesterday in a speech urging the country's business leaders to embrace Wall Street-style capital markets.

"While China's people work every bit as hard -- if not harder -- than people in other economies, they are not yet as well off," Paulson said in a speech at the Shanghai Futures Exchange, where only a handful of commodities are traded by local brokers.

"People in many other parts of the world have more choices of where and how to save and routinely earn a much better return," Paulson said of the limited investment options open to Chinese citizens.

The jolt to global financial markets last week triggered by a 9 percent drop in Shanghai shares reflects China's growing sway in international markets, as well as volatility in markets bloated by funds chasing too few investment opportunities.

Such volatility could be blunted by greater openness to international institutional investors and wider use of a variety of financial products including financial futures and corporate bonds, Paulson said.

"China is a large and powerful country, and you should not limit your own potential by restricting your access to world-class financial expertise that can enhance your capital markets."

Henry Paulson, US Treasury secretary

"China's markets lack these important elements," he said.

"Without a meaningful institutional investor base, the market relies too much on retail investors. The result can be a more speculative environment and more volatile equity market," he said.

Paulson, a former head of investment powerhouse Goldman Sachs, chastised China for capping foreign investment in local banks, securities firms, insurers and other industries, saying its markets are in many ways are less open than those of other, smaller countries in Asia.

He also noted that the share trading quotas granted to foreign institutional investors account for less than 2 percent of China's total market capitalization.

"Nations that want robust, sustainable, harmonious growth do not impose caps," Paulson said.

"China is a large and powerful country, and you should not limit your own potential by restricting your access to world-class financial expertise that can enhance your capital markets," he said.

Paulson made little mention of China's currency controls, an issue that along with product piracy concerns has long dominated the US trade dialogue with Beijing. But he had been expected to raise the topic at a meeting on Wednesday in Beijing with Chinese Vice Premier Wu Yi (吳儀).

China's leaders acknowledge the shortcomings of their developing financial markets. Just a week ago, Premier Wen Jiabao (溫家寶) rued the "many problems" needed to build up the industry. But they have balked at calls for faster reforms, saying the country's developing financial systems need more time to adapt.

In his speech, Paulson urged China to move quicker on diversifying its economy and allowing more foreign competition in finance as well as other industries.

"I don't know of a single country in the world with a successful and sustainable well-balanced economy that doesn't have a strong capital market in place," he said.

"Rebalancing your economy and welcoming international competition in the financial services sector is a win-win proposition," he said.

"With an underdeveloped financial sector, investment in China doesn't reach its potential in generating returns, personal saving is not adequately rewarded, and risk is not appropriately priced, managed, and diversified," Paulson said.
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