U.S. President Barack Obama signed a new financial regulatory bill, supposedly the most comprehensive overhaul on Wall Street since the Great Depression in the 1930s, into law in July. Zuo Xiaolei, chief economist at the Beijing-based Galaxy Securities Co. Ltd., contends that the new law could have adverse impact on emerging economies. She shared her views with Shanghai Securities News.
Edited excerpts follow:
I firmly believe the Banking Act of 1933—passed in the wake of the Great Depression in the 1930s, and all but abandoned in 1996—was the most comprehensive and strict supervisory law in U.S. history. It introduced the separation of bank types into commercial banking, involving deposits and loans, and investment banking, which served as a market intermediary.
I'm not saying the mixed operation of the two types of banking caused the 2008 financial crisis, but as we can see from the U.S. reaction, their regulatory body must believe a combination of commercial and investment banking was the root cause of the crisis.
The U.S. failure to monitor financial movements has taught emerging economies a valuable lesson.
Emerging economies, when developing their financial markets, must ask themselves these questions: Should we go down the same path that developed economies have already taken, and is designing various complicated financial derivatives the only way to develop our financial markets?
To avoid the same mistakes made by developed countries, emerging economies should not assume that what had been practiced in the United States is the right way of solving problems, and they should not follow blindly the Western methods.
Should the financial market be liberalized, or can financial capital flow freely without any restrictions? There's no evidence to show financial capital liberalization can bring about win-win situations for all nations. On the contrary, the large flow of financial capital into the commodity market has in effect distorted commodity prices, which violates the basic principles of economics.
In the first half of 2008, as a result of the financial crisis, international financial capital moved to the commodity market and triggered enormous hikes in commodity prices, specifically for crude oil. In the market of high risks, the unconstrained free flow of capital must be kicked out of the new international financial rules.
Can the financial supervision of different countries in the era of the global movement of capital stand apart from one another? The United States and the UK are lobbying for financial liberalization across the world, while at the same time strongly opposing global supervision.
In my opinion, the core of any new rules for the international financial market must be for the establishment of unified supervision guiding financial asset movements, commodity markets, derivatives and foreign exchange markets. The scale of hedging and arbitrage should be restricted, while excess speculation must be strictly prohibited.
Local authorities, especially those in emerging markets, should have the right to prudently manage and monitor international financial asset activities. Those activities should comply with international financial management rules. Western countries have no right to give countries that impose reasonable restrictions on financial asset movements a "non-market economy" status.
Therefore, global supervision over financial capital is the biggest appeal in framing new rules for financial overhauls in emerging economies.