In its search for a way to wean investors off of implicit government guarantees, will the Chinese government discover financial transparency?

As is well known in countries that have a transparency-based financial system, the quid pro quo for disclosure is investors are responsible for all losses on their investments.

This needs to be repeated.  In exchange for having access to the information necessary to assess the risk and potential reward of an investment, investors know they will not be bailed out for any losses they suffer.

For investors and governments, this is a good deal.

Investors can know what they own.  Because they are held responsible for all losses, they have an incentive to use the disclosed information to do so.  As a result, investors can limit their exposure to any investment to what they can afford to lose given the risk of the investment.

From a government’s perspective, this is a good deal because it removes all implicit government guarantees.  By focusing on ensuring disclosure of all the necessary information, the government avoids being seen as making investment recommendations and thereby creating an implicit guarantee.

The easiest way for the Chinese government to introduce financial transparency is by using the Transparency Label Initiative.  By using the Initiative, the government is making clear it is ending any implicit government guarantees.  The Initiative then does the hard work of dividing the securities in the Chinese financial markets between those that provide sufficient disclosure to know what you own and those that don’t.  As the labels are rolled out, investors will adjust their exposures accordingly.