Finance and Financial Sector Development

The crisis certainly hit China hard, but the spillover to banks has been minimal thus far. Photo courtesy of randylane under a Creative Commons license.

The story of the current financial crisis is well-known now and much has been written.  Indeed, we’re now at the point where many observers are indicating that the crisis is now at an end.  It would seem that the immediate financial sector impacts are leveling off, but in many countries the economic recovery will likely take a long time.  However, a number of emerging markets have come out of the crisis in relatively stable shape.  China is the most prominent example.  In fact, one might say that China is having a “good crisis” in certain ways as it has lifted its prominence – it is the one large country seen as leading the world out of this global crisis.  The same applies for China’s financial system given that many of its banks are now the largest in the world and (at least on the surface) posting strong performance. 

As China’s economy seems to be recovering, many people here have expressed concerns about inflation. I was able to air my views on the subject in an Op-Ed in China’s main English language newspaper, the China Daily, together with two other experts.

In motivating their concerns on inflation, people cite the unprecedented fiscal and monetary stimulus in many countries to combat the global economic crisis, China’s own large-scale stimulus measures, or recent increases in prices of several food items as possible reasons. In my view we do not have to worry about inflation for now. There is simply too much spare capacity across the world. However, the very loose monetary conditions in China can cause other damage if left unchecked for too long. It makes sense to try to avoid future asset price bubbles and problems for banks’ balance sheets.

When the capacity of the economy to supply goods and services (given by its factories, workers, etc.) exceeds demand, as happens in a crisis, there is pressure for prices to fall. A continued decline in prices (deflation) can in turn aggravate the economic crisis, because consumers expect prices will be lower in the future and so have an incentive to postpone purchases. They also fear that their wages (the price of labor) may decline along with other prices, and tend to save more. These factors further reduce demand and may create a vicious cycle, such as the one that happened in Japan in the 1990s.

But not all changes in prices are related to the underlying domestic economy. If price changes are expected to be "one-off" then the expectations of consumers about future prices do not change, and the logic above does not apply.

It’s now evident that people in developing countries have access to the internet and mobile phones like never before, which (as I recently wrote about) may lead to increased economic growth, job creation and good governance. A huge piece of this broad puzzle is mobile banking, and utilizing mobile phones to bring financial services to people who wouldn't otherwise have access to banks ("unbanked").

A new study, released last month by the Consultative Group to Assist the Poor (CGAP) and GSMA, estimates that there are more than one billion people worldwide who are unbanked, yet have access to mobile phones. And by 2012, that number is expected to grow to 1.7 billion people.