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Economic structure needs adjustment

By Sun Lijian (China Daily)
Updated: 2006-12-21 11:27

In fact, many countries taking part in such economic co-operation have become large trading partners with China. A slump in China's trade would pose a direct threat to the economic growth of these countries, which means China, as a trading power, would have an ever-growing influence on the world economy.

But this position poses severe challenges for China in its current stage.

The trade surplus several years in a row has brought China the world's largest reserve of foreign exchange. But the shock to the economy from the oversupply of currency with high circulation could not be cushioned by the country's financial arrangements, the most important of which are the currency exchange and interest rate systems.

So the policies issued one after the other by the central bank to improve the economic situation can never be really independent or effective.

The lack of development of China's financial services can be reflected in several areas.

First, the country's financial resources are mainly controlled by the banking sector because China only has a fledgling capital market. To make things worse, banks depend heavily on enterprises for profits while these businesses usually enjoy preferential policies on their bank loan interest rates.

Under the inflexible exchange and interest rate systems, banks only see increasing deposits from their clients, which become growing debts for them.

Given the limits on the interest rate, banks can only try to seek more profitable loans like mortgages, or personal loans for individuals with inadequate credit records, thus the risk is obviously elevated to a dangerous level.

Meanwhile, there is not an efficient mechanism to re-allocate financial resources across society.

Seeing the ever-widening gap between the rich and the poor as well as the yet to be developed social security system, consumers could not help worrying about their medical care, pension funds, education and even unemployment in the future. They would think it a wise choice to refrain from spending and put their income into banks.

As long as these concerns remain, bank deposits will continue to expand even after the economic growth is translated into a substantial increase in individual disposable income.

Other factors for sound development of the financial sector include an environment for financial investment and public awareness on this point.
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(For more biz stories, please visit Industry Updates)



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