Cover, issue no. 399, December 22, 2008
Original article:[Chinese]
China's State Council released a 30-point blueprint to tackle financial strains on the night of Dec 13, prescribing measures to loosen monetary policies, ease credit policies, build and maintain a sound capital market.
We may interpret the blueprint as supplement measures to the four trillion yuan financial stimulus package introduced earlier, a move to boost consumption and domestic demand to weather the economic slowdown from a holistic approach.
Besides prescribing some urgent measures, such as broadening money supply and demanding commercial banks to extend four trillion yuan of additional loans within 2008, the blueprint also stipulates ways to reform the financial system.
They include more flexibility on the minimum allowable lending rates, a better developed central bank's interest rate system, the development of a multi-layer capital market, and innovation in fund raising.
The blueprint shows that on the one hand, our policy makers have deployed all available tools instead of relying on one single strategy to weather the economy downturn; and on the other hand, they have considered it an opportunity for financial reform while mitigating the financial challenges with various policies.
Such a combination of policies is reasonable and necessary.
During the 1997-1998 financial crisis, the government could simply order banks to support certain projects and companies. Today, however, most of the major state-owned banks are public listed, therefore their actions are governed and restricted by market forces and shareholders' desire.
At present, there still exist regulations that hinder the development of financial market -- the interest rate system has yet to be fully market-oriented, credit policies and regulations that prevent innovation of financial products and better services.
Whether the financial sector can effectively prop up the economy depends heavily on how market-oriented and innovative the sector is. Therefore, reforming the financial system can fuel the economy.
However, government intervention in time of crisis is justifiable, especially when financial institutions appear to be reluctant in lending.
So far, the Chinese government has already intervened to boost credit flows by offering loan guarantee and interest payment subsidies to companies in difficulties.
The blueprint also stressed that if necessary, the government would activate other counter measures, including that of giving special liquidity support, stripping off bad assets, injecting funds to fulfil capital requirement, and providing guarantee to cover banks' liabilities.
All these with a single aim to ensure the stability and sound operations of domestic financial institutions. This could help to stabilize market expectations and strengthen public confidence.
Having said that, we must be realistic and understand that the latest blueprint will not deliver immediate effect; it will neither bring an instant turnaround of the economy nor boost market liquidity at once.
Economic data from the past revealed that when a credit crunch took place, neither monetary nor fiscal remedies could yield immediate results to resolve urgent problems; but we expect the effects to slowly trickle through by mid 2009.
In the foreseeable future, China's real economy will be put to test. It will face employment problems, its companies will have to fight for their survival, consumer spending will remain tight.
Despite all the challenges, we still believe the model of combining market-rescue plans with financial reform strategies is crucial for China's long-term economic development.
It is like treating a patient, whereby the best treatment is one that help the patient to recover, and at the same time strengthens his immunity system to better deal with future attacks.
Cyclical economic downturns and adjustments are bound to happen again in the future, if we only focus on resolving immediate problems and fail to set eyes on long term benefits, we might in fact planting more risks for future.
