China's central bank slam global lack of regulation - By Chris Oliver

Posted by ProjectC 
<blockquote>'Even in the classical period of Chinese history, however, there were a number of perceptive economists who saw the futility of government regulation of prices as a means of controlling inflation. In fact, they placed the blame for high prices squarely on the shoulders of the government itself. The economist Yeh Shih (AD 1150–1223), for instance, anticipated by several centuries the principle known as Gresham's law in the West.

"The men who do not inquire into the fundamental cause," he wrote, "simply think that paper should be used when money is scarce. But as soon as paper is employed, money becomes still less. Therefore, it is not only that the sufficiency of goods cannot be seen, but also that the sufficiency of money cannot be seen."[[url=http://mises.org/story/3346#_ftn21]21[/url]]

Another economist of about the same time, Yuan Hsieh (AD 1223), saw the principle even more clearly:
<blockquote> "Now, the officials are anxious to increase wealth, and want to put both iron money and copper money in circulation. If money were suddenly made abundant during a period of scarcity, it should be very good. But the fact never can be so. Formerly, because the paper money was too much, the copper money became less. If we now add the iron money to it, should not the copper money but become still less? Formerly, because the paper money was too much, the price of commodities was dear. If we now add the iron money to the market, would the price not become still dearer? ... When we look over the different provinces, the general facts are these. Where paper and money are both employed, paper is super-abundant, but money is always insufficient. Where the copper money is the only currency without any other money, money is usually abundant. Therefore, we know that the paper can only injure the copper money, but not help its insufficiency.[[url=http://mises.org/story/3346#_ftn22]22[/url]]" '</blockquote>
- Robert L. Scheuttinger and Eamonn F. Butler, Wage and Price Controls in the Ancient World, 2/27/2009</blockquote>


<blockquote>"Evidence abounds that boards of directors at some systemically important financial firms in the U.S. were rendered as a 'gentlemen's club,' which rubber-stamp all major decisions sponsored by the management."
- People's Bank of China</blockquote>

China's central bank slam global lack of regulation

PBOC says idea that markets can regulate themselves is fallacy

By Chris Oliver, MarketWatch
March 27, 2009
<a href="[www.marketwatch.com]{CB4E5CC6-5C82-4C9A-B2B8-679BA58896E5}&siteid=yhoof">Source</a>

HONG KONG (MarketWatch) -- A new statement by the People's Bank of China lambastes financial regulators around the world for missing the warning signs leading up to the current crisis and dismisses the notion that markets can regulate themselves.

The 2,500-word essay published on the PBOC's Web site late Thursday did not single out the U.S. or European regulatory agencies by name, but identified Enron and WorldCom as "debacles" that should have been red flags for more supervision.

"The evolution of the crisis demonstrated that due to the profit-driven nature of market players, market forces, if unchecked, will lead to asset bubbles and ultimately a disastrous market clearing in the form of a financial crisis like the current one," the statement said.

It did, however, specifically mention problems the Chinese central bank sees with U.S. corporate culture.

"Evidence abounds that boards of directors at some systemically important financial firms in the U.S. were rendered as a 'gentlemen's club,' which rubber-stamp all major decisions sponsored by the management," it said.

"This has led to lack of effective check and balance mechanism, which tolerated excessive risk-taking in pursuit of short-term rewards," the PBOC said.

Latest in a series

The statement, published in both English and Chinese, was similar in tone to three other essays authored by PBOC Gov. Zhou Xiaochuan earlier this week.

Zhou's latest essay, also released late Thursday, said economic growth in China is recovering due to the country's "superior system advantage." See full story on Zhou's latest statement.

The series of remarks from Zhou and his fellow bankers also come as world leaders position themselves for a meeting in London next week of top officials from the Group of 20 leading and developing economies.

Divisions have emerged over the appropriate policy response to revive the global economy, with stimulus-spending measures and new financial-services rules in focus.

Qu Hongbin, HSBC's chief economist for China, said Friday: "This is basically the Chinese government preparing for what they are going to say in the coming G20 meeting. They are trying to increase their voice about how they see things and what their perspective is in terms of the current global crisis."

A broad theme in the latest PBOC article is that regulation has failed to keep pace with the emergence of new financial products, institutions, and markets.

"Regulators do not have a good understanding of the cross-border activities of internationally active financial institutions. In particular, there is a lack of understanding of international capital flows," the statement said.

It called upon the International Monetary fund to set up an "early warning system" to watch out for destabilizing international capital flows.

It added that international organizations have been pre-occupied with exchange-rate regimes of emerging economies while falling short in monitoring international capital flows. Read full PBOC statement.

That last remark was likely a dig at U.S. and other officials who have criticized China for purportedly keeping its currency, the yuan, low against those of its trading partners in order to make its exports cheaper.

Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.