For at least the past decade, the People’s Republic of China has been enjoying a period of hyper-accelerated economic growth (Country Economic Review, 2002). Foreign companies are investing in China at unprecedented rates, as China has available land, human resources, and lower wages that make it an attractive location to do business. In addition, the Chinese government has committed itself to the pursuit of an aggressive policy of modernization, which has both generated impressive revenues and attracted even more foreign investment and participation in China’s economy (Country Economic Review, 2002). Still another variable that is having a significant impact on the Chinese economy is the fact that China will be host of the 2008 Summer Olympics, which the country anticipates will boost tourism and international interest that will result in substantial economic gains (Country Economic Review, 2002). Finally, China recently joined the World Trade Organization, and it is expected that China’s “annual long-term gain from WTO membership will be equivalent to 1% ofGDP” (Country Economic Review, 2002, p. i). As the country has enjoyed all of these economic benefits, the annual household income has increased, and an emerging consumer culture has begun to further stimulate the national economy (Country Economic Review, 2002).
With exciting gains, however, come substantial and serious risks (Country Economic Review, 2002). First, if the country’s growth so outstrips the economic performance of other countries, it is likely that revenues from trade will be affected negatively (Country Economic Review, 2002). Second, other countries’ interest in China’s spectacular growth make China susceptible to prospectors that can destabilize domestic and nationally-run businesses, including the banking industry. The Country Economic Review (2002) contends that “Foreign banks have competitive advantages in providing a wide range of financial services, data processing, management information systems, and skilled human resources” when compared to China’s domestic banks (p. 1). Already, major American financial corporations have established a significant and strong presence in China.
One of the most critical and immediate risks to the Chinese economy, however, is that of corruption (Barboza, 2005). In an investigative report on China’s banking industry, Barboza (2005) reported that fiscal corruption is rampant in China, and may be even more problematic and widespread than in the United States, where scandals at Enron, WorldCom, and other domestic companies have drawn international attention to the problems of bribery, extortion, and funds mismanagement. The extent and scope of corruption in China is staggering. Barboza (2005) reported that in January and February of 2005 alone, “a branch manager at the Bank of China disappeared with more than $100 million in cash. A few weeks later, dozens of employees of another commercial bank were arrested for conspiring to steal nearly $1 billion” (para. 3). Then, mid-management executives at the China Construction Bank absconded with $8 million” (Barboza, 2005, para. 3). These incidents, which represent just a handful among many, highlight “an ugly byproduct of China’s aggressive embrace of a freewheeling, get-rich-quick form of capitalism” (para. 4).
Barboza (2005) interviewed several economists and professors who explained that there are significant discrepancies between the appearance of China’s economy and its actual robustness. There is a gap between theGDPand the country’s financing system. Because the country’s economy has grown so much so quickly, the country hardly had time to craft a long-term economic strategy and, not surprisingly, has fallen victim to the kinds of pitfalls warned against by Friedman (1969) and Fraser (1994). As Barboza (2005) explained, “The government has been forced to bridge the gap betweenGDPand the financing system by “by dipping into its huge foreign currency reserves [in 2004] to wipe out some $22.5 billion in bad loans at the Bank of China and the China Construction Bank” (para. 10). Ultimately, the instability caused by these conditions may scare off investors, leading to a decline in the revenue stream that is, at present, so strong.
Moving forward, China will be forced to make a decision about the role that its central bank will play in crafting policies and practices that can effectively manage the unique conditions that characterize the political, economic, and social landscape at this time. The central bank of China has undergone several restructuring initiatives since the 1990s. The most recent change occurred in 2003, when the government approved the People’s Bank of China to play a more active role in developing and implementing financial policies for the country. Yet, given the massive problem of corruption, the People’s Bank of China has an enormous responsibility in an enormous country. Fraser (1994), wrote that “If central banks are to be independent of the government, then they must be accountable for their actions” (p. 8). One of the first and most important responsibilities, then, will be for the People’s Bank of China to determine how accountability and responsibility can be safeguarded. It hardly seems to be an improvement when a central bank achieves independence and eliminates or at least minimizes government control, if it is held hostage to the equally destructive whims of greedy financial executives (Barboza, 2005).
