Liu Mingkang: Responding to the Challenges of 2012

A year of political bickering in the United States and debt crisis in Europe has negatively affected China, raising serious questions for 2012: Will China slide with the rest of the world into an economic downturn? With risks guaranteed to increase, will Chinese banks remain profitable? What direction will financial reform take, and what will drive it?

Liu Mingkang is in a good position to answer these questions. As chairman of the China Banking Regulatory Commissiona (CBRC) from its founding in 2003 until his retirement in October, Liu personally presided over its quarterly analysis conferences. The mainland's banking regulator still maintains this tradition, winning it the praise of industry insiders. In late December 2011, Liu talked with Caixin about China's economic position in the world in the coming year and the task of financial reform.

Caixin: What kind of global economic situation can we expect in 2012?

Liu: I've said in the past that this economic crisis will spread from the United States to Europe and finally land in Asia. Now we can see that it's already begun influencing Asia.

For example, growth in China's auto industry has been cut in half. A stock of over 750,000 autos had accumulated in warehouses as of November, now up to nearly 800,000. Even though this is all part of a natural cycle, cars grow obsolete quickly. This kind of stock could spiral out of control, which indicates that this is quite a serious excess of capacity.

Or take the shipbuilding industry for example. That's been affected by changing demands from Europe and the United States, too. As of right now, they haven't had a single order for a long time. I trust that the relevant state departments are already rigorously controlling the expansion of production capacity in these industries.

From a macro perspective, the global economic situation has four major characteristics.

First, there have been massive changes to power structures that push growth. Contribution rates to the global economy from nations outside the G8 countries have for the first time reached and surpassed that of the G8. It's possible that the global economic growth rate for 2012 won't reach 3 percent, but emerging economies should hold to around 6 percent.

Second, there have been changes to market growth structures. In the past, the United States and Europe were the major consumer markets, and China was the world's factory. Forty percent of our exports were shipped off to the United States and Europe, more if one factors in exports transited through Hong Kong. But that proportion slid dramatically in 2011, as Asia (including the Middle East) became the major export target. Even though Asia still didn't buy as much as the United States and Europe last year, the proportion is shifting. African and South American markets are still not terribly big, but they too are growing.

Third, the role of government has changed greatly in every nation. For one, they have begun to actively support the development and adjustment of business. This has mostly been accomplished through expansionary fiscal and monetary policy. For another, governments have begun strengthening regulation where there was none before in domains that experienced problems during the financial crisis. Whether the G8 or G20 come to a consensus or not, governments should begin playing a larger role in domains where pure market force fails.