Bottom-up Financial Reforms

Since the onslaught of the financial crisis, the global economy has confronted an array of challenges to secure robust, balanced and sustainable growth. In confronting these challenges, what matters most are reforms and the resolve to carry them out.

The emphasis seems to be on financial reforms by the Central Government, such as reforms on large commercial banks and on interest and exchange rates.

However, by taking a page from the past we see that a bottom-top approach to reforms by which people can draw on the experience of trial projects as well as a top-bottom approach has done much for Chinas rapid growth and development.

It is widely believed that financial reforms can only be implemented from the top down, because the spillover effect of reforms in some areas or for some commodities is very strong in a free and vibrant market.

The ultimate effect of trial reforms may deviate from their original intentions, producing a positive or negative impact on neighboring areas. Trial reforms also breed inequality. That is, when reforms are confined to certain areas, or different reforms are carried out in different areas, inequality in resource allocation seems inevitable.

Over the course of Chinas development, despite the coexistence of the above-mentioned reforms, a top-bottom approach has been more common.

However, it is widely recognized that smallscale trial reforms limited to a region or a city can strengthen economic and social development, promote innovation and maintain social stability.

Local and regional governments show great enthusiasm for initiating pilot reforms and expect all-round policy support by stressing that the reforms are comprehensive, as opposed to the lack of reform momentum in some East European countries.

Why are trial reforms so common in China but rare in some smaller countries? For one thing, the complicated conditions and imbalanced development among different regions in China make it impossible for the country to learn from other countries. Furthermore, internal imbalances are severe in the development of rural and urban areas, the east and the west, and the manufactur- ing, agricultural and service industries.

In addition, some reforms are so large in scale that decision makers find it difficult to decide whether or not to put them into practice. As a result, reforms usually begin on a small scale. It is a growing process, during which people can learn lessons and make improvements.

During Chinas early development, when four cities—Shenzhen, Zhuhai, Shantou and Xiamen—were designated as special economic zones, a spillover effect and unfair competition existed because it is impossible to limit the reforms outcomes to the above four cities.

Nonetheless, for a country as large as China, where it is difficult to carry out changes nationwide, decision makers should weigh the advantages and disadvantages of launching trial projects and encouraging innovation.

Moreover, enthusiasm for small-scale reform should be supported. Both local governments and enterprises—as long as they have the intention to innovate—should be allowed to make attempts, learn from their mistakes and implement changes.

Implementing reform is a learning process. No matter how good a reform looks on paper, defects will emerge upon implementation. Only by learning from failures can future improvements be made.

There is disagreement as to whether related laws and regulations should be put in place before trial reforms are carried out. But the question remains over how rules can predate concrete actions. Some people say China can draw from the similar experiences of other countries or even duplicate a set of laws.

Nevertheless, in certain fields, it is difficult to ensure success by blindly borrowing from others because China now is transforming an economy with severe internal imbalances. In dealing with the problem of legislation and implementation, a choice also has to be made as to whether the central or local governments should be the initiator.

55.6 %

Chinas non-manufacturing PMI in November, a 0.1-percentage month-onmonth increase.

50.6 %

Chinas manufacturing PMI in November, a 0.4-percentage month-on-month increase.

51.4 %

The PMI for Chinese large enterprises, a 0.5-percentage month-on-month increase.