Jin Liqun, the man at the helm of China’s $410 billion sovereign wealth fund China Investment Corporation (CIC), has emerged as a standard bearer for libertarian free-market principles.
In a delicious twist of irony, yesterday he slammed the US government and regulators for imposing useless, destructive and counter-productive regulations on the financial world. These new regulations, he believes, are the biggest threat to global growth.
“Over-regulation and inappropriate intervention are the major risks to the global recovery and threaten the efficient operation of the financial system,” he said. “In the US and Europe, over-regulation is all the rage. Excessive regulation in any sector is detrimental to the economy, just as excessive taxation is destructive.”
Speaking at the Asian Financial Co-operation Conference organised by the Boao Forum for Asia in Mumbai, Jin noted the juxtaposition between what governments in the West are saying in support of free markets and what they are doing to prevent the free flow of capital.
“There is a discrepancy. On the one hand people cling to Western economic theories of free markets. On the other hand the governments and the regulators in the West are tightening their control of capital flows. “
This tightening of regulation, he said, will drive away investment. Coming from the head of one of the world’s largest sovereign wealth funds, this admission carries huge weight. The West needs financial investors such as CIC, but risks pushing them away in a misguided attempt to reduce perceived risks.
“The financial industry is particularly sensitive to excessive regulation,” said Jin. “It imposes high costs that drive capital and companies to freer jurisdictions. Financial investors vote by foot, or nowadays by a click on the computer screen.”
Jin was particularly scathing about the US equity market and what has happened to the US’s market dominance in the last decade.
Citing a US government report, he showed that in 2000 nine out of every 10 dollars in global equity markets was raised in the US. In 2005, that was reversed, so nine out of every 10 dollars was raised outside the US.
Moreover a US Government Accounting Office study found that from 2000 to 2005 the number of companies delisting from the US equity market and going private increased from 143 a year to 245.
For Jin, this collapse was down to the effects of excessive regulation, particularly the Sarbanes-Oxley Act enacted in 2002.
“The reason behind this loss of US competitiveness is not hard to find: the Sarbanes-Oxley Act of 2002 placed extremely costly additional financial burdens and cost the US market $1.4 trillion of lost market value,” he said.
“It has also reduced the willingness of US corporations to take risks, which has had an adverse long-term impact on the US economy. And this is meant to be the paramount free market in the world.”
Pointedly, he noted that “the Sarbanes-Oxley Act played precisely no role in preventing the outbreak of the financial crisis in 2007-2008. This attempt to cure problems that are not problems at all has clearly not helped the US economy.”
According to Jin, US regulators have not learned how damaging excessive regulation can be. Moreover, heavy-handed enforcement of regulations amounts to little more than blackmail.
“The SEC has placed a number of costly new regulations on companies that have not been justified by competent cost-benefit analysis,” he said. “Worse, the SEC has engaged in a number of enforcement abuses, notably charging companies in the press with possible securities violation without sufficient proof. This makes these companies subject to SEC ... blackmail.”
What is notable about these comments is that they come from such a leading member of China’s state-capitalist firmament. But they will surely resonate with investors and companies around the world who are frustrated by excessive regulation in the West.
In Asia, there is growing irritation that new regulations being passed in the West for overtly political reasons are having a global impact.
The extra territorial reach of regulations such as Fatca, or Basel III, infuriates them. By expressly saying that these new regulations are deterring investment from an organisation as important as CIC, Jin’s comments need to be heard at the highest levels.