Ten Years since 2008: China's Future Financial Policy
Mao Zhenhua, Shenzhen Innovation and Development Institute president delivered a speech at the China Reform Forum -China’s financial development strategy held jointly by Shenzhen Innovation and Development Institute and China Society of Economic Reform in Beijing, reviewing monetary policies and financial regulations measures ten years from the 2008 financial crisis and suggesting on China’s financial strategies for the future.
Since the crisis in 1929, most of the financial crises have been debt crises, observes Mao. For one thing, debt affect the distribution of resources in the future and contribute to the growth of real economy. For another, excessive amount of debt leads to financial crisis. In the past three decades, structural debt problems piled up in China, yet at a limited scale. However, now that China has gone through rapid growth and built up a large amount of debts, we should reflect on the debt issue in China thoroughly.
The avarice embedded in financial institutions and professionals requires regulation. The game between regulation and avarice of the financial industry reflects the creation and the development of a financial crisis. Mao admits that he is quite reserved with regards to how much growth financial innovation, especially those wild ones, bring about. Ironically, some wild financial innovation comes from not the need of the real economy but the rough restrictions of regulations. For instance, the Basel Agreement regulates the capital adequacy ratio for banks, motivating banks to shift their on-balance-sheet assets to off-balance-sheet. This change does not have anything to do with economic performance but ‘innovations’ in financial services.
In terms of shifts in China’s financial policy, Mao points out that like what happened in 2008, we have seen a cycle of austerity and lax monetary policy this year. Mao suggests that China should set financial stability as the goal rather than rely solely on lax monetary policy. In addition, we should be aware of the fact that capitals tend to flow to industries that can make money through adding leverage, and that this inflow of capital does not solve the problem of the real economy and can be very dangerous. Moreover, Mao points out that in face of financial crisis, China increased investment dramatically through increases in debts, and that most of the money have been loaned to SOEs and local governments. What the debt-investment-expansion model costs, in Mao’s words, are the larger role of government and a shrinking market. This is what we should avoid in days to come.
Mao warns that we should not only avoid weak supervision but also be cautious not to inflict the Herd Effect with increasing regulation. He suggests that we should strengthen regulation on financial institutions and professionals to avoid wild innovations. Finally, Mao emphasizes the necessity and significance to increase corporates’ returns on equity.