REGULATIONS
Seeds of Regulatory Change: PwC Partner Discusses Reforms, Pitfalls
December 13, 2007
Christopher Bjorke, AFP

Timothy Pagett is a partner with PricewaterhouseCoopers in Beijing, where he tracks issues in governance, risk and compliance. He recently spoke on China's regulatory, accounting, banking and financial market reforms at the Association for Financial Professionals' Annual Conference.

Can you start by giving us an outlook on some important issues occurring in China now? Clearly, now is a very exciting time for China, both domestically and also on the global scene. When you look at the way things are developing from an economic perspective, things just go from strength to strength to strength. The whole country is in the midst of reform, but economic and financial reform as well as elements of political reform.

I think the most exciting thing, particularly working in an environment within financial services, is what's happening within the domestic banking market. The fact that following the accession to the World Trade Organization and the meeting of the commitments at the end of last year and the beginning of this year, we've now seen an opening up of the banking sector to international competition, albeit, it's probably a bit slower than the international banks would like to see.

Can you talk about any regulatory changes happening right now? The whole regulatory framework that has managed, basically, banks' participation within the domestic renminbi market has really been thrown open. And with that comes the opportunity for international banks to start to take a far more active role within the retail market, and clearly that's a very exciting prospect, with potential depositors numbering somewhere on the order of about 500 million, and with credit cards doubling in their use every year for the past three years, we're really starting to see the beginnings of quite an amazing financial services sector.

The second piece of real regulatory development is to do largely with the domestic banks in that the CBRC have now provided a platform to move to Basel II and started to take the first steps toward a risk-based capital framework. And what that's doing is really providing a platform for the major domestic banks to substantially enhance their credit risk management capabilities, as well as their overall management capabilities.

Do you have a sense of whether transparency among potential business partners in China is improving? It's an interesting point, because I think transparency has always been an issue. Culturally, China is a very different place to do business in. It is a phenomenally different place to live in, which has its unique day-to-day challenges, and those challenges are really reflected in the business environment. Coming to grips with your partners' different psyche, different approach to doing business, different cultural way to approaching day-to-day life is one of the key elements that drive transparency. I think in the corporate world, some of the veil of secrecy has started to be lifted, particularly with the opening of the capital markets. The CSRC, who are the securities regulator, have been quite prominent in the past couple of years, putting in more stringent requirements around disclosure and much harsher penalties associated with failure to comply with those disclosure requirements.

Now that may be an overly positive view on life in China, because there's still a long way to go. The seeds are there and some water has been thrown on the ground, but whether the ground is fertile enough to grow some strong transparency, I think the proof will be over time.

Are the any potential pitfalls in the future that could reduce some of the progress we've seen? I think the biggest unknown is that China has had for the past decade this permanently positive growth outlook, and it's been in the process of reforming its whole financial sector. It hasn't experienced in its current context any form of significant downturn.

There is still connectivity to the global economy. The liquidity crisis that's happened on the back of the subprime, how much of that actually flows back into Asia? If there's a downturn of consumption in the U.S., how much of that actually hits China? China has a very strong export base and has been quite vocal in saying actually it's not only exporting just to the U.S., but actually it's exporting across Asia. So therefore it should actually be able to dampen the effect of any downturn of consumption in the U.S. But I think in reality, many of the places that China exports to are ultimately exporters to the U.S., and I think that the U.S. economy is still a bellwether for most of the global economy. So if there's a substantial slowdown here, how that then translates back into China is an issue.

I think a secondary issue is domestically whether inflation becomes a significant factor. We've already seen quite extortionate wage inflation and quite significant cost-of-living inflation. But again, it's still a country that is developing, and with the majority of the population still sitting outside the major cities, it's hard to tell what impact that will have. But both of those elements are fairly high on the policy agenda of the party.

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