July 1, 2011 2:41 am

Beware assuming China has a normal market economy

From Mr William Gamble.

Sir, In your editorial “China’s emerging municipal mess” (June 29) you suggest that the way out for China is to allow the municipalities to issue bonds that “would require municipalities to be more transparent about their finances”. As usual, financial experts from the developed world put forward a proposal that assumes that China and other emerging markets have the same rules and so can have the same solutions.

 Information, especially about municipal financing, has enormous value. It is given away only for a consideration or because of a legal disincentive. There are no such disincentives in China. Even if there were, you would have the government trying to enforce rules on itself, which has never worked anywhere.

 To solve this problem and to get better transparency, you need an independent judiciary. But the greatest method of providing transparency, as the FT well knows, is free speech and free press. Without fear of exposure and market retaliation, there is no reason for municipalities to give up anything.

 In the present system, the bonds would no doubt be exchanged for outstanding debt. Worse, the bonds would probably be allowed to be part of Chinese banks’ capital reserves like the worthless bonds given by the asset management corporations almost 10 years ago.

 By proposing such “reforms”, the FT is merely continuing to promote the illusion that China has a normal market economy with a sound legal framework, which is one of the worst ways to encourage a “wasteful and unaccountable system”.

 William Gamble,

Emerging Market Strategies,

Newport, RI, US

Printed from: http://www.ft.com/cms/s/0/c85f3622-a377-11e0-8990-00144feabdc0.html