Financial reform in China and Hong Kong 1978-89: a comparative overview

Abstract

This paper compares financial reforms in China and Hong Kong — prototypes of a command economy and a laissez-faire economy respectively—from 1978 to 1989. In China, the objectives ofßnancial reform were to correct the excesses of 'ßmncial repression', to end China's isolation from the world ßnancial system, and to build up a macroeconomic stabilisation mechanism based on'economic levers'. The paper finds that China made considerable progress towards the first two objectives, but failed to achieve the third. The main reason was that the ownership system and the price system remained largely unchanged, so that the endemic 'soft budget constraint' rendered any effective monetary-fiscal policy virtually impossible. In Hong Kong, the main objectives ofßnancial reform were to enhance its status as an international ßnancial centre, to strengthen the prudential-regulatory framework for preventing recurrent banking crises, and to design a new monetary system capable of insulating the economy from exogenous political shocks. In all three objectives, Hong Kong made notable progress during the period under review. In the concluding section, Guangzhou, the capital of Guangdong Province and the major Chinese city closest to Hong Kong geographically and culturally, is selected for comparison with Hong Kong in terms ofßnancial deepening. The gap is found to be striking. The fashionable view that there has been a movement towards ßnancial convergence in the two economies — one moving towards liberalisation and deregulation, the other moving towards greater prudential regulation by the government — is unwarranted. Show more