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Zhang Jingwei: US deregulation could upset China’s financial reforms

2017-02-13

By Zhang Jingwei    Source: Global Times    Published: 2017-2-12

 

Following a wave of executive orders signed by new US President Donald Trump over a couple of weeks, he made a new move by directing the Secretary of the Treasury to review the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as Dodd-Frank, an act passed by the Obama Administration in 2010 in response to the 2008 financial crisis.

 


Six years after the implementation of the Dodd-Frank Act, the US has hiked its benchmark interest rate as its economy is gaining momentum. In order to achieve the goal of making America great again, a slew of fiscal policies and financial regulations need to be in place and infrastructure expansion will be needed as well. In order to motivate US manufacturing, abundant financing opportunities will need to be provided to market players who find it difficult to obtain loans from banks.


Although Dodd-Frank is unlikely to be repealed, as it would take time and require congressional approval, the possibility does make market participants in China worry about potential impacts on them and China`s financial system.


In my opinion, any rollback to Dodd-Frank is unlikely to transmit directly into the Chinese market in the short run, but we need to stay alert and watch closely to avoid a situation where concerns over the US financial markets become reality.


The 2008 global financial crisis that began with the US subprime mortgage crisis took a heavy toll on China. The Chinese economy now has entered a stage of new normal, and its development of the real economy and markets in terms of real estate, Chinese yuan, stocks and bonds all require structural reforms. Financial deregulation from the US is likely to make its financial institutions forget about the pain suffered in the past, and there is also a chance that the big boys on Wall Street will resume their previous fever of chasing quick money while overlooking the risks. The global economy in general hasn`t recovered from the last crisis, and the US` financial regulatory loosening isn`t anticipated to boost global markets, but will export financial risks that could induce a new crisis.


The previous crisis has planted illness in the global economy for nine years. Profound lessons learned have demonstrated a global consensus to strengthen regulation on financial markets, and if Trump executes financial relief to Wall Street, another situation in which the whole world has to take medicine if the US becomes ill could be the outcome.


China has entered a crucial phase of financial reforms. Before the 2008 financial crisis, global markets held blind faith in financial innovation from Wall Street elites. The Dodd-Frank Act enacted by the US sent an alert to China that it should keep the pace of its financial innovation and marketization at a certain level. Even though regulatory relief could lead to a market boom in the short term, this prosperity under the disguise of greed of capital could carry the seed for another financial crisis. This could upset the ongoing financial reforms in China and cause uproar.


The US subprime mortgage crisis led to the creation of the Dodd-Frank Act, and also diverted a number of financial professionals from Wall Street to the emerging market of China to start businesses. If Trump rolls back the Dodd-Frank Act, more financial talents could be expected to flood into Wall Street, which would be a huge loss for China in terms of capital and talent.


However, being the most sophisticated financial market, financial supervision in the US indeed needs to advance with the times, including appropriate adjustments and revisions in the Dodd-Frank Act. The reason why Trump`s executive order on evaluating financial regulations and identifying those that are too burdensome has triggered anxieties across the globe is because of the disruptive characteristic of his politics.


The author is a visiting fellow of Chongyang Institute for Financial Studies, Renmin University of China.

Key Words: US   China   finance   Zhang Jingwei  

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