Strengthening Financial Position: China - Case Study Example

China G20 Position paper xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Executive summary The recent global financial crisis has enacted sharp reaction from developed countries prompting them to reform international financial regulations. The paper will conclusively give detail information on how strengthening of financial regulations. It will begin by giving a brief introduction of the action and the G20 group then a rationale will be issued based on why the action was chosen which will be followed by a concrete background about the action. The second part which is the body will discuss purpose of regulation, approaches to financial regulations, china reforms and economic transformation and auditor, board and their roles. The final part will give recommendation based on the strengthening of financial regulation followed by a conclusive remark on the whole discussed issues. China G20 Position paper Strengthening financial position Introduction The group of twenty commonly known as G20 is a group which premium forum for almost all international economic cooperation. The group consists of members from 19 members and representative from European Union. Regularly, the members of the G20 summit meet in order to address both financial and economic challenges1. Evidently, the key role defined in this group is constantly responding to global economic crisis. The coordinated and decisive actions within G20 have widely boosted both business and consumer confidence not forgetting that it has highly displayed signs of economic recovery. Clearly, as the global economic is gradually moving towards recovery, G20 focus has shifted towards planning of the removal for the known extraordinary stimuli factors not forgetting improving financial regulation, reforming on international financial institutions and finally strengthening global economy. One of the primary summits need to be discussed by G20 is primarily focused on strengthening financial regulation where there is need for the development of a 47point action plan so as to arrest the decreasing financial market measures as well as improving international financial regulation over desirable medium terms2. Leaders especially those from china agreed to resist what is known as trade protectionism and constantly work towards the conclusion of the Doha round3. Based on the summit about strengthening financial regulation, it is evident that although countries are undertaking major reforms in ensuring that there will be no other global recession in the near future, such reforms may fail to take place due to the power given to international financial industry. Therefore, need to strengthen financial regulation especially in those areas that have proven to be insufficient. Rationale for action For china, the global order is widely based on consensus of independent countries. Clearly multilateral and bilateral understanding and treaties between independent countries are considered to be important elements towards global economic recovery. This calls for action since China is considered to be the single biggest victim of international trade protectionist due to the fact that this country has suffered losses worth ten billion us dollars from trade protectionism4. As a way of strengthening financial regulation, the country call for large effort to coordinate macro-economic policies, growth of international trade, promotion of global financial reconstruction and finally, common development. China believes that there is a rationale in strengthening financial regulation in that there is constant guidance for quotas reform within IMF as well as provision of a political impetus. Evidently, it is believed that strengthening of financial regulation through coordination of Chinas macro-economic policies will enhance global recovery from the recent world wide recession. The nature exhibited by the impact of financial global reassertion recently explains why China is interested in strengthening financial regulation. China as a country hope that developed countries will refrain themselves from constantly using protectionism measure in future. Background of the situation The recent financial global crisis is considered to be the biggest of its nature for decades. In response for this global financial crisis, G20 saw the need of implementing the action ‘strengthening financial regulation’. Government form many countries which includes China were forced to borrow huge amounts of money in order to assist their financial sector survives. The G20 leaders met for the first time in the year 2008 where the initial name was ‘Summit on Financial markets and World Economy”. Participant within the group saw the need to gather and discuss on both financial crisis and global economy and how it affects the world. The need to create to deliver stimuli towards economic recovery, countries realized the need to strengthen international financial sector regulatory systems5. Further, the G20 has been the core in awakening calls of the recent global uncertainty. The global reassertion called for tightening the rules as well as enforcing designed financial regulations. The members indicated that this can be achieved by way of demanding national enforcement not forgetting outlining various global financial standards. The fact that china as a nation need to be very cautious in the various step it undertakes in internationalizing it currency, there was need for the country to work with international community in tightening both banking and financial regulation by strengthening financial regulation mechanism6. In addition, the gradual increase in emerging markets displays less developed capitals that substantially lack suitable innovative capital instrument thus calling out for need to implement the strengthening of financial regulation. Purposes of financial regulation The purpose of financial regulation is to facilitate legitimate financial and business activities and safeguard the stake holder’s interests. This is aimed at ensuring fair and justified competition among the service producers and providers in the market. The policies are aimed at deterring firms from engaging in illegal and unfair economic activities. The policies are also aimed at offering responses to breaches to effectively deal with unfair economic practices7. The approaches to financial regulation The financial regulations are to offer the financial stake holders with the assurance of the supervisory authority. They are to offer control to those financial institutions that the stake holders are not in a position to control and gain confidence that this is being done effectively. The regulatory authorities are to have a wide and enlightened understanding of the financial and business sectors that they are to supervise and control. The effective regulatory approaches are to aim at increasing confidence and integrity in the financial stake holders. They are aimed at causing the financial and business entities gain sight on their overall objectives8. In the application of the regulatory approaches it has to be emphasized that effectiveness has to be paramount. The entities that are subject to scrutiny including the stake holders have to be effective in their activities. The regulatory committee has to be clear and strong in the as well as maintain public commitment in the processing of the regulatory responsibilities. This involves the incorporation of the required and necessary skills to be able to identify the right and needed procedures in the supervisory and control process9. Moreover, the supervisory and regulation committee has to be accountable. Thus should be independent and free from any political interference. The authorities are obliged to be accountable to the democratic authorities for them to freely and effectively perform their functions. The auditor, board and their roles in financial regulation The boards formed by the government or the existing companies in the Chinese People’s Republic are to ensure that the firms and financial institutions comply with the requirements according to the law. The regulations that govern the functioning of the boards are governed by the Act on the financial regulation. The board is to set parameters for the acceptable behavioral practices which should be undertaken in the name of the company. The company regulations Act is aimed at ensuring the firms transact their business in a transparent while at the same time treating the parties and other involved stake holders in a fair and just way. The board is to ensure the efficient and effective flow of information through all the organs of the firm and that all the members of the firm are involved in the decision making. The individuals in the board are to act in accordance with the law that is to guide on their duties. This is to be done in high consideration of the business standard conduct. The designed policies are to guide the employees of the various financial firms to act in accordance with the legally accepted practices10. The board as a regulatory organ is to follow the laid down financial regulatory rules as agreed in the G20 April meeting of the year 2009. These regulations are to ensure the board guides the firm to have strengthened regulations aimed at promoting integrity, propriety and transparency. The functions of the board are to ensure that the relevant and appropriate human resources with required skills are hired to drive the business to the required financial levels11. The sound and financially knowledgeable work force is to in turn aim at generating financial confidence and trust in the financial firms as well as promoting long term financial interests for the firms. It is upon the board to ensure that the financial decisions are not an obligation of individuals or one arm of the financial institution. The board is to consist of non executive members and thus be able to an independence attitude of objectivity and sound decision making to the financial institutions. All the stake holders and share holders in the financial institutions are to be involved in the decision making for the collective and best interest of the firm. There should also be rules involving the financial responsibilities of the individual stake holders and share holders to avoid the conflict of interest. This should include the clear channels of financial reporting and the storage of financial information. The firms are to transparently which should involve the financial assistance and evaluations of an external auditor12. This is to ensure that the right information is available to the stake holders and other interested parties at the right time. The parties involved in the board and the financial regulation management is to play by the same rules as governed under the financial regulations Act. The rules are to create a balance between safeguarding the financial interests of the stake holders and the facilitation of fair and just financial transactions. The board and the financial management institutions are to set out clear channels and regulations that ensure the monitoring of the rules and their compliance13. Addressing global imbalances In addressing the global imbalances, the Chinese People’s Republic has created insurance mechanisms that are credible for those countries that forego accumulations in the reserve in order to accumulate the domestic expansions. This is in addition to central line swap lines, pooling reserves and the expansion of the IMF resources. The reserve facilities are to come with little conditions to those countries that are affected by global shocks. The measures are aimed at developing the emerging markets while paying particular emphasis to the local currencies14. This will enable the country to promote regional cooperation thus being able to lift the cross border barriers on trading on assets within regions. The measures are also aimed at decreasing the adverse effects of deflation that have had negative economic implications to most developing and developed nations. China financial reforms and economic transformation Achievement of a successful transition towards a balanced economic system will require the government of China to establish a well designed financial reform program. Although the program will benefit the nation as a whole, it will contribute greatly to rejuvenation of the banking system in China. China Investment Corporation (CIC) will particularly have commercial interest in the program since it is a major stake holder of China’s banking system. Implementation of the financial reforms requires a clear and careful sequencing and road mapping. China has been able to achieve this by moving away from quantitative limits on credit and replacing it with tools of conventional monetary. This involves de-regulation of rates on deposits and loans and allowing them and other rates as well to be determined by market forces15. Besides this, the banking system in China has been under strict and constant evaluation and monitoring to determine areas of vulnerability that might cause serious risk to the system of credit quality. The banking system has undergone continuous commercial orientation with the aim of boosting supervision. China has constantly exploited alternative options to the existing bank-based intermediation system. Furthermore it has encouraged development of equities, mutual funds, annuities, corporate bonds, securitized assets and insurance with the aim of having a stronger banking system. Besides this, the institutional investor base has been strengthened and there has been improved flexibility of the exchange rates of the central bank so as to run a monetary system that is more independent, counter-cyclical and activist. The largest G20 summit was held in London in April 2009 by presidents of member countries’ including the president of China was held to address the pressing issue of financial crisis affecting the world at large. It had been noted that despite endless efforts the situation still persisted hence there was need to review the plan and maybe come up with new strategies. The G20 agreed on providing a big package of US$ 1 trillion to revive the collapsing global economy. In addition the participants of the conference discussed key steps that would assist in recovery of the global economy. Before this summit the central bank governor and the G20 minister of finance had met to discuss on an action plan to jump-start global financial growth and reinforce the global financial system. It was agreed that any stumbling blocks that affected the economic stimulus measures and credit flows should be eliminated so as to create more job opportunities and boost global demand. The summit also came to the agreement that they would support developing and emerging economies in order to counter the negative effects international capital flow16. There have been ambitious measures by the G20 to strengthen and transform the international financial system. Some of these measures include reinforced international co-operation, tougher post-recovery financial regulations and major markets regulations. These measures were aimed at helping to resolve the global financial crises hence they were made for use by all economies of the nations of the world and the G20 put monitoring programs that will ensure that the measures were being implemented as required. The initiative also included rules on banks across the world such as black listing of defaulters which could possibly lead to sanctions17. Members of the G20 have worked closely with each other and have constantly emphasized on global unity so that achievements can be assessed collectively. Recommendations The minister of finance together with the governor of central bank should strive to ensure there is an effective credit flow and enhance the economic stimulus in order to increase employment rates in China18. The government of China should reinforce its policies on competition in both local and international markets in order to regulate unfair economic activities and illegal deals. A financial institution can be established which should be fully devoted to monitoring of the financial situations in China. The government of China should work closely with the G20 so as to revive the global economy since financial crises in other countries adversely affect the economy of China19. Conclusion In conclusion, well planned financial reforms in China will be a fundamental step to both the economy of China and that of the entire global as well. However, the process has to be handled with much care, flexibility and skill if the country aspires to achieve the 12th Five Year Plan. With intellectual rigor, innovation and practical skills, China will be able to achieve its long term goals of attaining a stable financial system. In addition to this, its participation in the international G20 summit will enable it to gain partner expertise in running its financial matters20. 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