Financial reform in Australia and China (Other (Not Listed) Sample)

[FINANCIAL REFORM IN AUSTRALIA AND CHINA]
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Financial reform in Australia and China
Summary
The article sheds light on particular aspects with regard to financial reforms in Australia and China and an analysis to compare and contrast the two countries on the same has been undertaken. In Australia, there has been a series of gradual changes in the flexible exchange rate regimes. The alteration was due to the developments in the financial markets and close incorporation with worldwide markets. This made it challenging for the bodies in charge to accomplish the monetary conditions in terms of the exchange and control rates.
Owing to the many challenges, the authorities had to come up with ways to respond to the difficulties, which was done through the financial reforms in 1970s and 1980s. Before the 1970s, there was a fixed exchange rate regime in Australia that was controlled by capital controls and the regulated domestic banking segment. The system of capital controls prohibited all foreign currency transactions except if they were sanctioned or discharged by the ruling classes. Involvement in the market (foreign exchange) was limited to selected trade-off banks that served as representatives for the central bank.
The domestic banking sector had heavy regulations particularly with controls on ceilings on banks deposit and lending rates as well as the requirement rates. The regulations have been used as the main monetary policy tools in 1950s, 1960s and 1970s. They have depicted to be useful in serving monetary purposes as well as maintaining the exchange rate system that is fixed in Australia by controlling capital inflows into the banking segment.
In the 1970s, it became difficult to maintain a fixed exchange rate regime because of the large non-official capital inflow. The effectiveness of the monetary policies reduced due to the growing non-bank financial sectors, large capital flows as well as the structural issues within the government’s debt market. The growth in the non-bank financial sector prompted the government towards deregulation of the banking sector. This later laid a foundation for the float exchange rate.
In 1980s, the impact of the deregulation was evident in Australia both positively and negatively. There was an increase in the innovation and integration of the financial markets though the Australian exchange control system became ineffective. With consistency failures in the control system, the floating system was adopted. The float increased the volatility of the exchange rate, there was stability of interest rates and effective control of the domestic financial conditions by the authorities.
Unlike Australia, China had a well-managed transition from an economy that is centrally planned to a market oriented economy. Prior to the reforms, the central government was in charge of setting the interest rates on loans and deposits, stock, interbank and bond markets did not exist.
China had a major focus in reducing the role played by the national government in the economy. As such, the reforms towards building the modern financial system facilitated deregulation. The country reforms also led to expanding the financial system due to the increase in growth in productivity and output. Besides, the growth in the financial systems led to increased openness to the international trade, there was increase in international capital flows thus dismantling the centrally planned exports and imports.
In China, there have been several significant changes after the reform. There is a general structure of the inside financial ruling, robust controls on the capital flow portfolio as well the steady rise in currency. For instance, the creation of a separate banking regulator has strengthened the regulatory framework, interest and exchange rates are more flexible, there is a shift in the emphasis of the monetary policy and limitations on capital currents have been detached.
The financial reforms in both countries have similarities and differences. For instance, both countries up to the 1990s as well as before adoption of the float, they enforced irregular capital controls. Restrictions were constricted on residents’ investment overseas as compared to the foreign investment in the domestic economies.
Australia and China took different paths towards liberalisation. In Australia, the financial liberalisation and the capital account were prompted by the massive external pressures that were caused by the up surged integration of the financial flows in the world and the small economic size of Australia as well as the country’s relatively open capital account. There was a series of reforms before the float system was adopted in Australia. The approach was not reactive because the authorities had an earlier thought of the requisite for transformation and the technique of implementation. However, Australian approach towards reform was quick and in response to the external alterations that showed flaws in the system.
On the contrary, China’s approach towards reform has been characterised by certain desired objectives of ultimate interest rates, exchange rates as well as the capital account liberalisation. Moreover, China has used partial reforms like pilot programs before implementing and expanding the scope. In conclusion, it is evident that China is at a more developed phase of reform as compared to Australia, particularly in development of the financial system.
Evaluation and Appraisal
This article is a description of both the Australian and China’s experience in domestic monetary deregulation, the float exchange rate and the capital account liberalisation. As such, there is comparison of both countries with regard to the circumstances facing their financial systems and the efforts channelled to China as they reform their financial system currently.
The Australian experience and approach towards reform is different from what China is using, therefore, it cannot be a recommendation towards financial reforms in China. For instance, the sequencing of deregulation in Australia will not apply in the Chinese setting. However, if the reforms are explored with caution the Chinese could realise long run benefits in its economy. This is because, Australian reforms are effective in building a robust and strong economy as well as a robust financial system in the long term.
Following an extensive analysis, some characteristics of the Australian financial system before deregulation are evident in China today. In Australia, there was an accomplished exchange rate regime as well as capital account dealings that were highly restricted and the tight regulations in the banking system. Similar to China in the current age, where there is high prohibition of the portfolio capital flows, the interest rates under the banking sector are partially liberalised and the renminbi exchange rate is still managed.
Inevitably, there are significant dissimilarities as well. In the international economy, the weight of Australia was smaller and the financial reforms took place in a smaller and less integrated financial system globally. In the 1970s and early 1980s Australian capital account was restricted in comparison to other alike economies. However, Australia was further exposed to external portfolio investment in comparison to China today. Besides, in China there is a greater direct investment flow in comparison to Australia before liberalisation of the capital account relative to GDP and in absolute terms.
The findings in the article are insightful and practically significant in the financial systems. For instance, the Australian example shows the consequences of sequencing as an approach to reforms and the catastrophic effects of liberalising. The floating exchange rate is popular and recognised as a vital tool that steered the econo...