KEY POINTS:
I was at a conference last week in Beijing. It was the usual drill: young gods of the universe (aka investment bankers) telling us how China had to change, and was going to change - to make us all rich (especially the bankers).
To be fair, that includes
the Chinese. They would also benefit from a Western-style economy, especially with regard to the capital markets.
Yet bankers need to remember that not everybody inhabits their world of hand-made suits and thousand-dollar shoes. Indeed, it may even have come as a surprise to the bankers at the conference that the Chinese leaders have a country to run, and quite a large and complex one at that.
I was reminded of this by a book I'm reading, a rather dull tome on the banking dynasty of the Rothschilds. They were the first international investment bank, primarily engaged in organising loans to the governments of 19th century Europe. Given that they are still around and still very rich, they did very well.
One chapter in the book deals with the 1830 revolution in France and it made me realise just how political the opening of the financial markets is.
One of the tactics of the investment banks is never to talk about politics. Most journalists stationed in China go along with this.
That's because journalists covering China in any depth are business journalists. We are in the habit of looking at economic numbers and business trends - and it is indeed a huge story. And we self-censor. There is absolutely no upside in talking about politics in a country which can and has expelled journalists.
We don't want to leave one of the most rewarding beats a journalist can cover. That's why much of the human rights complaints about China comes from organisations and writers based outside China. But back to the political nature of the financial markets.
What comes across very strongly in the Rothschild book is the extraordinary political sensitivity of the government bond market during the 1830 revolution. The bond markets acted exactly like a barometer of the market's opinion of the existing Government. You could also say the price of government bonds acted like an instant polling result of governmental moves.
Thus, if a Cabinet minister who the bond market thought was good for the economy was fired, bond prices would go down. If peace, rather than war, appeared more likely, bond prices would rally.
The clear delineation of this process in the book made me realise how unlikely it would be for the Chinese Government to permit a similar system to flourish. Think of the potential loss of face if the bond market decided it didn't like, for example, the Government risking war with the US over Taiwan. Or if the bond market didn't like the latest moves on the currency. The Government would be under pressure to do something - because a bond market is inherently a counterbalancing force.
Far more effectively than newspapers and TV, it represents some of the most powerful economic interests in the country, since it's composed of giant pension funds, state entities such as the National Social Security Fund and even state-run companies investing spare cash in bonds. Entities such as the NSSF are important, as they represent people's future pensions. The Government would have to listen.
Would this be a disaster for the country? I suspect it wouldn't. China's leadership is paralysed and inefficient. Today's two top leaders have nothing like the prestige of their predecessor Deng Xiaoping - who not only appointed his successor, Jiang Zemin, but Jiang's successors as well.
As a result, one is hearing regular reports out of Beijing that the Government is suffering from political paralysis. So I'm with the bankers on this one: a strong reaction from the markets on certain policies would help steer the Government in the right direction and break the gridlock.
But will it happen? I'm sceptical. The Chinese economy is performing incredibly well, registering 10.7 per cent GDP growth last year. But it's still run by a party which will stop at nothing to stay in power.
Censorship has grown worse - precisely because the Government's economic success has increased its power and legitimacy. But this is still a Government highly intolerant of dissent. It would be mind-boggling if it allowed the bond market to dictate policy on topics which the Government believes are non-negotiable: the reunification with Taiwan, for example.
Most dictatorships have run closed economic systems for that reason. They don't like being challenged by independent entities, which is what functioning markets are composed of.
Clearly, an independent bond market has pros and cons. The idea of the party unleashing the markets at this point strikes me as highly improbable. There are too many stress points in Chinese society at the moment for me to believe that the leadership would welcome even further disruption. However, I see no reason why the Government wouldn't eventually allow the markets a greater role - if only to provide guidance over policies on which the Government may be irrevocably split.