Jun 21, 2013 07:05 PM

Closer Look: A Heartening Endorsement of the Market from the Very Top


The State Council on June 19 came up with a whole package of policy measures designed to strengthen the support the financial industry gave to the transformation and upgrading of the economy.

It was hardly an original move: the government rolls out policies more frequently and with greater intensity in times of economic difficulties. This has happened before.

What sets this reaction apart from previous policies aimed to revive the economy, however, is it puts much more significant emphasis on market forces.

Liquidity in the interbank market has tightened recently because tougher regulations and a change in bond trading rules coincided with seasonal factors that often lead to cash shortages. The stock and bond markets have slipped, and many market participants grumbled that the central bank had been too grudging with credit supply.

The State Council announced at the meeting, however, that it would continue implementing a prudent monetary policy and keep the growth of money supply at a reasonable pace. Underpinning the decision, the cabinet said, was the central government's judgment that the overall economy had been stable though the environment had been more complex.

By the end of May, the amount of M2, a broad gauge of money supply, has increased by 15.8 percent from a year ago, exceeding the goal of 13 percent set by the Central Economic Work Conference early this year.

The government has again restated its attitude: the current liquidity shortage is temporary and a result of structural imbalance, and it will have to be overcome by financial institutions adjusting themselves accordingly.

This has reinforced the perception that the government is confident about its grip on the economy and will neither be disturbed by signs of trouble nor rush to prescribe medicines that cure symptoms rather than the disease.

Monetary policies should play a greater role in restructuring the economy, maintaining growth and improving the people's welfare, the State Council said at the meeting.

But how? It answered by proposing activating the stock of money, without giving more details.

There is yet no consensus over what the proposal means exactly. But it is safe to conclude that any action would be along the lines of improving the efficiency of the financial market while sticking to the principle of prudent monetary policy.

That would also help solve a puzzle that has perplexed many people: Where has all the money gone? The question has been raised time and again when loan and money supply statistics do not jibe with the performance of the real economy.

The meeting also passed eight measures specifically engineered to encourage development in a range of fields, including interest rate reform, diversifying the capital market and encouraging private investments in the financial sector.

Among those efforts, the liberalization of interest rates has generated the most heat because it has been imperative to reduce the borrowing cost of the real economy.

The interest rates of bank loans are no longer subject to a ceiling, but they still cannot fall below 70 percent of the central bank's requirement. Progress has been made toward opening the country's capital account, with pilot programs underway to allow individuals to invest abroad.

Especially worth complimenting is the cabinet's pronounced support to private investors in the financial industry. That would come with more efficient regulations and a stronger risk control system.

The government clearly wants the market to play a greater role. It is also cautious not to push for changes too quickly.

Whether financial institutions will actively participate in the implementation of those policies will determine to a large extent whether the plan would work. So the next step of reform should focus on improving financial institutions themselves and be carried out as soon as possible.

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