Helping the real economy gain easier access to funds will be a pressing issue for plenum

The Third Plenary Session of the 18th National Congress of the Communist Party of China beginning on Nov 9 is expected to set the tone for new reforms in the coming years, and there are high expectations that it will signal further financial reforms.

Eliminating structural imbalances in the country's financial sector will be a key issue. Apart from the marketization of interest and exchange rates, the emphasis should be on how to raise the efficiency in distributing financial resources and how to ensure that real economic activities benefit from easier access to financial support.

China boasts a colossal stock of accumulated financial assets. However, a portion of these has not been fully utilized, with some sitting idle, because of poor structuring and maldistribution.

The country's financial system, mainly based on banking loans, has given a helping hand to the development of the sprawling manufacturing and infrastructure sectors, but there has been insufficient financial support for high-tech, services and small and medium-sized enterprises. Chinese banking loans have long favored large projects and large companies, so have mainly gone to government-subsidized projects, state-owned or large-sized enterprises, and dominant traditional industries while leaving many small and less powerful companies, mostly privately run, hungry for funds. For example, the large amount of credit that has gone to real estate and government-sponsored investment projects is the reason for the lackluster development of small and medium-sized manufacturers.

Irrational financial products have also put the squeeze on real economic activities. Rocketing social financing and a sharp rise in off-balance-sheet financing and bonds financing since 2011 have contrasted sharply with the continuous deceleration of the country's economic growth and the downturn of macroeconomic output. A large volume of additional currency has been injected into the market, but the lion's share has not entered the real economy. The direct consequence of this is weak industrial production, manufacturing investment and circulation of commodities. At the same time, the rising debt ratio and banks' hidden non-performing assets pose huge risks.

While money supply has risen sharply, the efficiency of the country's monetary output has fallen just as sharply. Overflowing currency supply since the eruption of the global financial crisis has resulted in declining currency output efficiency. Even if some of these additional currency supplies have flowed to the real economy, how much influence they will produce on real economic activities will depend on the pace of their circulation. Figures indicate that the pace of circulation of China's issued money since the global financial crisis has continually declined. The pace slowed from 0.63 in 2008 to 0.51 in 2012, a decline of nearly 20 percent. That slower pace means the decreasing influence of monetary inflation on economic output and efficiency.

All these highlight that future financial institutional reforms need to focus on developing a financial system that can effectively support the real economy and promote an optimized distribution system for financial resources.

On the one hand, the country should regulate the speed of its credit expansion prudently so as to stave off the possibility of a debt-reliant economy. At the same time, it should take practical steps to accelerate marketization of interest rates and the development of security-based assets, and promote direct financing and smooth channels for the circulation of social funds in the state financial system. On the other hand, effective measures should also be taken to optimize the country's financial structure and promote the transformation of its financial sector in tandem with its real economic transformation. To this end, the country should first give the green light to small and medium-sized banking institutions being set up that can better serve many SMEs and micro-sized enterprises. In many countries specialized financial agencies have been set up to offer credit support to small and medium-sized enterprises.

China should also try to promote the capitalization of its scientific research to make its financial resources more accessible to real economic activities. Instead of the financial system that was established in the traditional industrial economic era, a modern financial system needs to be developed to facilitate the country's economic upgrading and industrial innovation.

The country should regard such a financial system as a strategic task and embrace preferential policies, such as fiscal input, research, credit and financing, to create a comprehensive financial system that can offer financial assistance to develop of the real economy.

The author is a researcher at the State Information Center. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 11/08/2013 page11)