Setting financial tones

The painful meltdown of Wall Street's virtual economy has taught China a valuable lesson: overexpansion of the virtual economy can have serious consequences. At the fourth National Financial Work Conference on January 6-7, Premier Wen Jiabao noted that the country should direct its capital into the real economy, clamp down on rampant speculation and avoid reckless expansion in the virtual economy.

This was the first time Chinese policymakers issued their concerns for the virtual economy. This warning is expected to help spare the country from a possible financial crisis like the United States experienced in 2008. The overwhelming financial disaster has taken a heavy toll on the world's economy and its ripple effect remains a bottleneck choking growth of the world economy.

The National Financial Work Conference, held every five years, is China's top-level financial meeting. It usually sets the tone for the country's financial policies and maps out major reform measures for relevant institutions.

China has hosted the conference three times since 1997. But this time, both domestic and overseas financial landscapes have changed significantly. The European debt crisis is unlikely to be fixed any time soon, though it is less likely to deteriorate. That means China needs to put up defenses against external risks. Domestically, the country's financial safety faces several looming threats, such as default risks of local government's financing vehicles, regional property bubbles, waning external demands and abrupt cross-border capital flows.

Obviously, those risks have been the top concern for policymakers. How to ensure financial stability and safety became a hot issue at the conference.

Zhao Xijun, Deputy Director of the Financial and Securities Institute at the Renmin University of China, praised the government's call for closer links with the real economy.

"The experiences of advanced economies have showed that risks would escalate if financial institutions only focused on speculative trading and product design, instead of services for the real economy," he said.

Guo Tianyong, Director of the Research Center of China's Banking Industry under the Central University of Finance and Economics, said the conference sent out a strong signal that the top priority of the financial industry is to better serve the real economy.

"Another focus is how to lift the efficiency and service level of the financial industry without igniting risks," he said.

"To achieve that, policymakers must encourage private investors to play a bigger role in the sector," added Guo. "But financial institutions must not decouple from the real economy."

Marketization of interest rates and bond market reform were not discussed at the conference, despite expectations that these issues would come up in talks.

Zhou Xiaochuan, Governor of the People's Bank of China, the central bank, told Xinhua News Agency that China has been pushing marketization of interest rates, but the sequence of the steps should be aligned in line with domestic and overseas economic situations.

"First of all, we have to deepen reforms to make financial institutions meet the required accounting standards," he said.

"China's large commercial banks have completed shareholding reforms and listed their stocks, paving way for interest rate marketization," added Zhou. "But now is not a good timing to actually push through the marketization reform."

"In response to the financial crisis, some developed countries have kept their interest rates at zero level. So if China now allows its interest rates to freely float, that will cause some acute problems such as dramatic capital flows," he said.