Discussing China’s Financial Future

Discussing China’s Financial Future

The ongoing global financial crisis, which has its origins in the U.S. subprime debt collapse of 2008, has plunged the whole world into a deep and continuing recession.

However, in spite of the extreme economic damage the crisis has caused, it has also left something positive; it serves as a lesson to policymakers who can now work out preventive measures to guard against future disasters.

As its economy has been stable throughout the crisis, China is in a prime position to learn from the mistakes that triggered the longest economic slowdown since the Great Depression. At the most recent national financial work conference held in Beijing on January 6-7, the Chinese Government said it would ensure that more capital was channeled into the country’s brick-and-mortar economy. This move largely stems from lessons learned from the current financial crisis in the Western world, where the development of the virtual financial economy in the early 2000s became unbridled. Inflated returns, legal loopholes and extremely complex financial products meant the financial sector was beyond effective management and supervision.

The decision to channel financial resources into the real economy will mitigate the risk of China suffering a Western-style financial crisis and also serve the needs of China’s own economy. For instance, as China moves into a more mature phase of development, small and medium-sized businesses across the country are in desperate need of cash, which they need to expand and grow. However, Chinese banks have traditionally been reluctant to lend to smaller businesses, lending instead to large state-owned enterprises. Moves to increase capital flows into smaller business will be conducive to achieving more balanced economic growth and social development.

Maintaining a sound and risk-free financial sector is also a crucial part of ensuring sustainable economic growth. The just concluded national financial work conference, the fourth of its kind since 1997, has set the tone for the country’s financial development in the coming five years. The previous conferences have helped China ward off the Asian financial crisis, deepen reforms to comply with its WTO commitments, and also helped the financial sector forge a modern banking system. Judging from the previous meetings’ success, we have reason to hope the guidelines and policies set down at the latest conference will help lead the nation’s financial sector in a more sustainable direction.