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China's Financial Sector Reforms Gain Momentum INSIGHTS FROM EURASIA GROUP POLITICS AND THE perspectives MARKETS OCTOBER 2007 China’s financial sector reforms gain momentum BY JASON KINDOPP DIRECTOR, ASIA he acceleration of financial sector reforms reflects policymakers’ desire to diversify capital allocation in the Chinese economy. The most significant initiatives seek to expand T opportunities for firms to raise equity capital and strengthen onshore stock markets. The government is actively fostering private equity and venture capital industries, and has signaled it is close to launching a new growth equity market (GEM). These measures, along with a recent liberalization in corporate bond issuance, Global Political are in turn pressuring China’s commercial banks to accel- Risk Index erate reform. The GPRI, which is produced by Eurasia Plans to broaden and deepen onshore equity mar- Group, measures a country’s ability to kets are emerging at a furious pace. Consistent with absorb political shocks. The higher the number, the more stable the country. Communist Party directives to cultivate domestic tech- nological innovation, as well as to support small and HUNGARY 78 SOUTH KOREA 76 medium-sized enterprises (SMEs), authorities are intent POLAND 73 on building up domestic private equity and venture BULGARIA 70 capital industries. In August 2007, the National Devel- TURKEY 68 opment and Reform Commission (NDRC) and the MEXICO 67 Ministry of Finance jointly launched a program to fund BRAZIL 66 CHINA 65 venture capital funds in nine sectors, including the IT, SOUTH AFRICA 64 telecom, energy and pharmaceutical industries. Similarly, RUSSIA 63 the government is combining its plan to foster indig- ARGENTINA 62 enous technological innovation with its support for the INDIA 61 THAILAND 61 Tianjin Binhai New Area special economic zone—part EGYPT 60 of a program to revitalize China’s northeast region—by ALGERIA 58 authorizing the establishment of up to 10 venture capital PHILIPPINES 58 funds to invest in innovative start-ups and technology COLOMBIA 57 UKRAINE 57 companies. Beijing is also overcoming its aversion to pri- GOVERNMENT SAUDI ARABIA 57 vate equity funds. In addition to launching state-owned INDONESIA 56 SOCIETY private equity firms, regulators lifted on September 11 the VENEZUELA 53 SECURITY government’s ban on domestic brokerages making private IRAN 51 equity investments by authorizing China International NIGERIA 50 ECONOMY PAKISTAN 44 Courtesy of Citi Private Bank Capital Corporation and Citic Securities Co. to make direct investments. CLOSE-UP: RUSSIA Chinese authorities have ambitious RESHUFFLE prOLONGS SUCCESSION SpeCULAtiON plans to deepen domestic stock markets, not only by increasing the number of STABILITY SPOTLIGHT The recent government reshuffle, in which initial and secondary public offerings but the largely unknown Viktor Zubkov was named also by creating exit opportunities for prime minister, prolongs the uncertainty sur- direct investments in mainland firms. A 63 rounding President Vladimir Putin’s succession. major trend this year has been for large The reshuffle demonstrates Putin’s firm control state-owned enterprises (SOEs) that RATING FORECAST of Russian political life, and suggests that he have listed abroad to make secondary will not become a lame-duck president. First placements on domestic exchanges. On Deputy Prime Ministers Sergei Ivanov and Dmitri August 22, the State Council approved Medvedev remain the leading potential successors, draft regulations to establish a new but Zubkov is now a leading contender as well. GEM, which is expected to launch in He is one of Putin’s old associates, and while his early 2008. The melding of direct equity political stripes are indistinct, he has some ties to investments in growth firms with a public the silovik clan among the Russian political elite. listing exit strategy on a newly established Zubkov’s relative anonymity and age (66) have GEM market could trigger capital flows fueled speculation that Putin could be planning into broad swaths of China’s economy. to groom Zubkov as a placeholder president, until At the same time, authorities are try- Viktor Zubkov, Russia’s newly he can return in 2012. If Zubkov’s public profile ing to strengthen mainland brokerages named prime minister, is a dramatically rises at home and abroad in the coming leading contender to succeed and expand the institutional investment months, this scenario might appear more likely. Vladimir Putin. industry. Regulators are poised to autho- The composition of the new cabinet, rize IPOs for as many as 10 domestic announced September 24, is positive for markets. Economy Minister brokerages that meet performance criteria. German Gref, Health Minister Mikhail Zurabov and Regional Authorities have also been quickly approv- Development Minister Vladimir Yakovlev were dismissed. They were ing new fund management companies. replaced by figures from the more liberal, reform-oriented wing of the Institutional investors were virtually non- Russian elite. Finance Minister Alexei Kudrin kept his post, and was existent a few years ago, and now more elevated to deputy prime minister, reflecting the Kremlin’s commitment than 60 fund management companies in to fiscal discipline and broad macroeconomic stability. The appointment China manage approximately $250bn. of Putin’s North Caucasus envoy Dmitri Kozak to the post of regional Increasing the vehicles for capital development minister places another succession contender, and a allocation is escalating pressure on China’s liberal technocrat, in charge of an important ministry with broad commercial banks to accelerate reforms. national reach. Corporate debt issuance is poised to increase opportunities for firms to raise capital. Calls for deepening bank reform have come from the top of the political RUSSIA SUCCESSION WATCH hierarchy, most recently in an August If presidential elections were held next Sunday, public statement by President Hu Jin- how would you vote? tao, who pledged to build a “modern banking system.” China’s banks also face 85% of respondents had not mounting pressures from foreign banks Potential Succesors Poll Data heard of Zubkov before his that have incorporated locally. Annual Viktor Zubkov 4% revenue growth in mainland operations, appointment as prime minister, Vladimir Zhirinovsky 11% among the best-positioned foreign banks and 39% of Russians already such as Standard Chartered and HSBC, Gennady Zyuganov 15% consider him Putin’s successor. has reached up to 80%. These pressures Dmitry Medvedev 30% will compel China’s banks to broaden their loan portfolios beyond traditional Sergei Ivanov 34% state-owned enterprises and increase fee- Source: Levada Center poll, 14–18 September, 1,600 respondents, 49 regions. based revenues. ➪ Legend: Positive change Negative change No rating ➪ 2 POLITICS AND THE MARKETS I nside the Index In the following briefs, Eurasia Group analysts highlight the connections between stability and key political issues in important emerging markets. LEGEND POLAND GOVERNMENT SOCIETY IRAQ SECURITY ECONOMY MEXICO SAUDI ARABIA Saudi Arabia GPRI 57 STOCK MARKET OPENS Saudi Arabia’s decision to open its stock market SOUTH AFRICA to investors from the rest of the Gulf Cooperation Council (GCC) nations on the ground, and the Iraqi South Africa from events the party more likely illustrates the kingdom’s government will likely face in global financial markets. to participate in future move toward more eco- new challenges, including a But South Africa’s cur- negotiations, despite nomic liberalization. high risk of implosion. rent account deficit, which opposition from party However, Saudi Arabia’s Meanwhile, tensions dropped to 6.5% of GDP leader and losing presi- decision stems from between the central gov- in the second quarter of dential candidate Andres broader geopolitical con- ernment in Baghdad and 2007 from a peak of 7.8% Manuel Lopez Obrador. siderations and is unlikely the Kurdish Regional Gov- in the fourth quarter of to stimulate the local index, ernment could flare up. 2006, remains a source Poland which has been down for Kurdish leaders are likely to of vulnerability, particu- GPRI 73 almost two years. The blame Prime Minister Nouri larly if commodity prices desire to implement equal- al Maliki for the expected drop rapidly. ELECTIONS UNCERTAIN ity among nationals of the postponement of the refer- As 21 October national GCC in holding and trading endum on the status of the Mexico: elections approach, it is stocks is intended to dem- oil-rich city of Kirkuk. onstrate the kingdom’s GPRI 67 still too early to call the commitment to regional winner. Law and Justice South Africa: REFORMS LIKELY integration—something it (PiS) and Civic Platform TO PASS had previously not deemed GPRI 64 (PO) parties are about even a high priority. Other GCC The congressional in the polls. Both PO and FOREIGN EXCHANGE states decided to open approval of both fiscal and the Left and Democrats RESERVES INCREASE their respective stock mar- electoral reforms confirms party (LiD) are pro-market; kets in 2002. The Reserve Bank’s Sep- Calderon’s pragmatic their win would be most tember review showed strategy and reinserts favorable for capital market that international reserves, the Mexican left into the participants and investors. Iraq before reserve-related legislative process. Both If PiS returns to power, the GPRI NA loans, increased from reforms are highly likely to outlook is cloudier; in the $28.3 billion at the end of pass in state legislatures. event of an economic slow- CHALLENGES CONTINUE June to $29.8 billion at the The modest fiscal reform down, fiscal policy could US decisions based on end of August. This should shows Calderon’s willing- become a problem because General David Petraeus’s strengthen the bank’s abil- ness to reach political PiS would be unwilling to progress report in Septem- ity to deal with financial compromises, improving make politically unpopular ber to the US Congress are market turmoil. Minister of the prospect for future decisions regarding not likely to affect the evo- Finance Trevor Manuel said reform negotiations. fiscal consolidation. lution of the situation in in early September that The approval of electoral Iraq.
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