Financial Reform in Australia and China
The financial system in Australia, which was present before deregulation in the 1970s and early 1980s, had some distinctive similarities to the current financial system in China. In China today, capital flows are greatly controlled, interest rates in the banking sector are only partly liberalized, and renminbi exchange rate are managed continuously. When closely compared, in the late 1970s, Australia managed exchange rate regime, the banking system was tightly regulated, and there was the restriction of capital account transaction. Some important differences are notably seen from the two economies. Australia's Economy weight in the global economy at that time was small compared to the China's present economy. Australia also implemented its reforms in the context of a much smaller and less integrated global financial system. Australia's economy was more open to foreign investment, and its capital account in the 1970s and 1980s was stricter than the current case in the China
Australia had a fixed exchange rate regime before the 1970s, as it was it characterized by a system of capital controls and highly regulated domestic financial sector. Policy makers viewed fixed exchange rate as being beneficial though the domestic financial sector remained underdeveloped. The fixed exchange rate regime played a big role in the underdevelopment of the financial sector as through this regime, Australia investment in abroad was restricted. It is seen in the authorities' preference for domestic savings to be channeled into domestic investment (Battellino 2007). As a result, the performance of Australia's economic development and Australia's investment abroad by 'non-official' sector was virtually non-existent before the 1970s.
In the 1970s, the authorities found it hard to maintain fixed exchange rates. It was because of increased flow of non-official capital inflows increase gradually and became more varied in nature. There was increase in non -banking sector combined with large capital inflows coupled with structural issues with government debt, which undermined the efficiency of the monetary policy (Grenville 1991). The authorities found it necessary to take initial steps towards banking sector deregulation. It laid the foundation for the eventual float of the exchange rate. These reforms made it difficult to control domestic monetary conditions. The increased capital coincided with the domestic mining boom in Australia, but this capital arrived as a portfolio rather than direct investment. Under the fixed exchange rate inflows added directly to the domestic liquidity as authorities ensured Australian dollar met all demands. During deregulation of the banking sector, the first step was effected in 1973. The interest rates ceiling on CDs was removed. This change allowed banks to compete for the resources and to have much influence of their balance sheets. Participants were able to speculate on the exchange rates
In the 1980s, there was a greater improvement in the financial innovation and integration.
The freeing of restrictions finally resulted in the removal of all ceilings on deposit rate by 1980, and this made it easier for banks to attract foreign funds (Battellino 2007). There was a substantial benefit to the Australian economy, which was brought by the introduction of a floating exchange rate. The exchange rate flexibility brought the better protection of the economy as it buffers the economy from the external shocks. The capital account liberalization also opened the development of the Australian corporate bank bonds.
China financial reform system reforms occurred gradually in a closely managed manner from a centrally planned economy. It was not the case in the Australian economy. Before the deregulation of the financial sector, the interest rates on the loans and deposits were set directly by the government. During this period interbank market, bond markets and the stock market did not exist. Reforms were consistent with the central planning. The initial economic reforms focused on reducing price controls and creating market incentives in agriculture and reducing barriers to entry in industries controlled by state-owned enterprises. Because of this, there was rapid growth in productivity.
Expanding the financial system was one of the key reforms. State-owned banks, as well as SOEs, played a key role in the deregulation of the banking sector because of their dominance. At the start of the reforms, the interest rates for deposits centrally set by the government. With expansion in the financial sector, the authorities began to experiment with increased interest rate flexibility
Another reform was to ease capital controls. Capital controls have been gradually removed in the wake of 2000s. Efforts have been made to internationalize the currency in the recent years. It has allowed the renminbi to accumulate in the offshore where it is freely tradable. It has helped the Chinese firms to trade better internationally as international trade is dominated in renminbi. This reform coupled with the flexibility in the exchange rate marked led to a gradual appreciation of the renminbi against the dollar. The appreciation put pressure on the renminbi and the steady inflow of foreign currency due to the trade surplus. It contributed to increasing china's foreign exchange reserves to us$3.8 trillion between the year 2005 and 2013
Evaluation and Appraisal
This article gives us an insight of the role of the deregulation to any economy in the world as well the challenges encountered in implementing these reforms. The author tries to explain the advantages and disadvantages of these reforms to the development of a stable and efficient financial system. Australia followed a different path in the reform implementation while China followed a different path; however, the advantages of these reforms are evident in the end. For complete deregulation to be achieved, there are key sectors, which need be reformed; banking sector, capital management, and foreign exchange market trading. Deregulation reforms in the two countries though there were at different economic status and different economic times; they all concentrated on these sectors. These are the pillars of the financial systems structure as this sectors influence the flow of finances within and out of the country. From this article, deregulation is seen to have largely been a success in bringing efficiency to Australian and Chinese economy by improving the range and pricing of financial services to consumers. Moreover, deregulation has brought increasing competitiveness of the financial services as well as improving the stability of the financial systems in both countries. There is more room for flexibility and greater efficiency in the financial sector as is evident from the essay. Deregulation also has its risks and for more stability, a more efficient regulatory framework is needed. This framework should be nationally consistent in its application across various participant groups and can vary the extent of regulatory oversight according to the level of the risk.
Deregulation of financial systems has very important role in the economic development. From this article, the author tries to put across the advantages of the financial reforms to any economy. I will broadly categorize these advantages into three categories, as it is evident from the article. Firstly the deregulation of the interest rates on both savings and deposits have very important role in creating a competitive as well as a very efficient financial system. Through its deregulation, the Australian and Chinese savers as well as borrowers can get optimal value for their money. The savers can get a good amount of interest on their savings while the borrowers can get loans at lower interest rates. Secondly, deregulation of the financial systems led to greater competition in the financial sector. The users of the financial services both business and individual were able to obtain a wider scale of choice as more players had more entry to the financial sector. Interbank competition, for example, grew because of the deregulation and the interest rate on loans went down because of tis competition. Finally, deregulation of financial systems in the two economies has led to the stability and integrity of the financial systems. The author shows that government restriction through central regulation of currency exchange rates as well as interest rate controlled to the inflexibility of the economy and underdevelopment. Deregulation ensured that there was more freedom in the market, and the participants could speculate the growth of the financial systems and more trust.
The government has an interest in regulating some industries with tougher rules and requirements. Financial sector serves so many people as a matter of necessity so proper policies need be put in place. The government, therefore, imposes these regulations to protect her peoples' interests. When deregulation is done, the governments' control over these sectors is removed, and any player can enter the market. The benefits are that service are efficient and of lower prices, but there are a few disadvantages as well. Firstly, deregulation led to unfair competition among the banks after floating deposits rates were implemented. In the situation of China, PBC permitted large banks to increase their lending rates for working capital to 20 percent, which was a higher value than the set benchmark. Commercial lending firms and cooperatives also implemented the same directive. Small banks with small working capital could not cope the trend, and this posed an unfair competition. Consequently, the government imposed regulation of limiting increasing the rates higher than the benchmark. Secondly, deregulation exposed the country's economy to global economic swings. For example due to floating exchange rate the Australian dollar peg continued to be difficult to maintain even after the implementation of floating exchange rates. It forced speculators in the year 1976 to force for the further discrete devaluation of the currency. Crawling peg was adopted as a measure to prevent the buildup of appreciation or depreciation pressures. Deregulation also exposed the inexperience of the stakeholders in managing the floating exchange rate. The players in the international markets increased the supply of foreign exchanges derivatives for hedging purposes. A well-structured framework is needed in implementing financial reforms to cushion the economy to avoid the above disadvantages. Moreover, well-experienced stakeholders are needed to drive the implementation process.
In conclusion, the benefits of deregulation of finance sector outweigh the disadvantages it poses to the economy. The author of this article illustrates the process of deregulation in two different economies and its role in the development of the respective economies. Deregulation, therefore, is positive for any economy provided it is well managed and well structured.