It is deemed necessary to consider the nature of the financial systems of two Asian countries – Japan and China and dwell on how this has impacted the behaviour and performance of these two countries.
Japanese financial systems
The first country of choice is Japan. It is seen that post Second World War, Japan has risen to become one of the Big Five financial powers of the world. The nature of the financial system is based on corporate governance, and credit market and money market activities. Thus, the influence exerted by wielders of corporate governance and government, including the “coalition of shareholders” over the monitoring of the financial system is robust and overpowering. (Okabe).
While earlier on, Japanese banking corporations played a lead role as providers of finance to industry and trade, the present trend of entrepreneurs and the business community is to seek funds from capital markets, thus lowering the dependence on commercial banks and industrial financial institutions. Thus, in the present scenario, the aspect of “cross-holdings” or shares being held by companies or banks, having commercial interests in the firm is also present. The trend of Japan’s financial system is a refreshing change from the capitalistic system, and under this system, newly floated shares are held by financial institutions and not individuals. Thus, as a result of institutional control over Japanese financial systems, it is expected to behave more responsibly and keep the best interests of shareholders in mind. This also has a positive effect on the performance of firms since the activities of the Board of Directors and top management of the firms are well monitored and any deviations could be promptly identified and remedial measures are taken. Thus, the aspect of corporate governance, fiscal discipline and public accountability, especially to the shareholders are deeply etched in the behaviour patterns and performance of Japanese companies and this has been reinforced by the overwhelming governance of a heavy governmental control system over the financial systems, especially in the public sector. As a matter of fact, in the present context of Japan’s financial system, reconsidering the role of the government intermediation service provider has become increasingly necessary. (Yamori & Nishigaki 2005).
Chinese financial systems
The second country that has been selected is China; it is seen that the Chinese financial system has long been dominated by a monolithic but inefficient banking system. (Allen, Qian & Qian 2005).
A major issue regarding public banking in China has been the endemic non-performing assets in banks which not only erode profits but public confidence too. The next aspect to be seen is with regard to the functioning of stock exchanges in China which is seen as part of the financial system. Since their behaviour has been quite speculative and mostly guided by insider activities, it is not regarded very highly in the financial systems of China. As a matter of fact, it is the optional financial outlets that are proving very useful in terms of behaviour and performance in China. This is because China is slowly but surely moving away from a closed economy to a market-driven one. As such, Chinese think tanks and lawmakers have understood that China needs to capitalise on global market opportunities if it has to economically compete with developing countries like India, Russia, Brazil, etc.
Foreign Direct Investments
The route China has chosen to reach out to international markets has been through a large influx of Foreign Direct Investment (FDI) which could now be termed as a significant part of the Chinese financial system. Since China joined the World Trade Organisation in 2001, its FDI has improved dramatically (Masson, Dobson & Lafrance 2008). Another behavioural aspect and it is now believed that has resulted out of this is that China takes pride in having a balance of payment surplus, which is directed towards outward Foreign Direct Investments, principally to developing countries of the world. China has been at the forefront of economic progress in the Asian region and is the most sought-after destination for outsourcing consumer goods and textiles, especially by European and American business houses.
“Some 300 of the 500 top trans-national companies in the world have invested in China, and foreign investments have become an important capital source for China’s economic development.” (Foreign aid and foreign investment in China 2009).
The investment mood in China is upbeat and reflects both Government and public support to enhance trade and development, particularly with Asian neighbours. The country has undergone a restrictive and highly controlled economic regime prior to 2001 and is now seeking to gain lost ground due to late entry into the global trade and financial arena. “Rather, it has become a late coming but powerful competitor among the dependent third world countries.” (The transformation of China).
While comparing the financial systems between Japan and China, it is necessary to understand that both these Asian countries had been largely affected during the Asian currency crisis in the late 1990s, and needed to make major financial restructuring to protect their financial interests and the currency valuation of Japanese Yen and Chinese Yuan. Both their economies had been highly governmentally restricted with no scope for major trade growth and diversification plans. However, it is necessary for both the Asian giants to actively participate in the mainstream global economic renaissance and capitalise on the favourable winds of economic changes that are currently sweeping world economies.
- Allen, Franklin, Qian, Jun & Qian, Meijun 2005, China’s financial system: past, present, and future.
- Foreign aid and foreign investment in China 2009, The Chinese Outpost. Web.
- Masson, Paul, Dobson, Wendy & Lafrance, Robert 2008, China’s integration into the global financial system.
- Okabe, Mitsuaki 2004, Policy and governance working paper series no. 17: the financial system and corporate governance in Japan.
- The transformation of China: pioneer Hong Kong.
- Yamori, Nobuyoshi & Nishigaki, Naruno 2005, The public financial system in Japan- re- verification of the ballooning theory and the privileged government enterprise theory.
- McCurry, Justin 2009, Fallout from US financial crisis blights Japanese growth, guardian.co.uk.
- Liqun, Zhang 2009, China can be the first to recover from global downturn: Gov’t economist, Silobreaker.