Too much easy money is invested in projects with low return rates. This will create debts instead of making profits in the real economy, and thus require more investment to fill the hole.

A vicious circle is formed in the process: the more investment is put in sectors with low returns to replace the debts, the more debt is created in the process.

That's why the real economy faces a money drain even when total social investment is staggering - the money rarely reaches the hands that need it and can make more out of it. A tight monetary policy, which many economists have proposed, cannot solve the problem. Only proper structural adjustments can finish the job.

The advice of many economists to tighten the monetary policy is also based on their worry about a possible debt crisis, but actually the Chinese government's debt accounts for just 50 to 90 percent of GDP, much lower than the 270 percent in the US, more than 300 percent in the European Union and 550 percent in Japan. So as long as the Chinese economy continues to grow, the danger of a debt crisis is not as high as imagined.

Given these deficiencies, it is not advisable for the government to only introduce a tight monetary policy. China's economic growth is not without problems, and its structure needs to be adjusted. But if China uses a tight monetary policy as the sole means of structural adjustment, it is highly likely to face an economic slowdown and encounter more serious problems.

Therefore, if China tightens the monetary policy, it needs to introduce some other measures, too, such as lowering the threshold of the financial market, allowing private capital to enter the economy and, most importantly, changing the role of local governments from decision makers to service providers. Of course, that is not the job of finance authorities alone and requires the determination of higher decision makers.

The author is a professor of finance at the Guanghua School of Management, Peking University. This is an excerpt from his speech at a recent meeting on the economy in the first half of 2013.

(China Daily 07/20/2013 page5)