Experts call for innovations in financial sector By Xiao Sun (China Daily) Updated: 2004-03-08 09:32
China should step up innovation in the financial sector to guard against
risks from increasing economic inequality as the country shifts to a market
economy, experts said on March 6.
Such risks arise from both high non-performing loans (NPL) in the banking
system and inequality in income distribution and livelihood for the rural
population as well as retirees and laid-off employees from State-owned
enterprises (SOEs).
Inequality is unavoidable during the economic transition, but the Chinese
economy could face unstable periods and risks if such issues are not addressed
properly and in a timely manner, they said.
Avoiding inequality would require a new and solid social security system,
revived taxation, wage subsidies and insurance for disadvantaged people and a
better regulatory and legal environment, said Robert Shiller, a renowned Yale
economist, at a financial forum jointly held by the Renmin University of China
and Peking University on Saturday in Beijing,
Shiller made some bold suggestions to help China fend off potential economic
risks during the transition. He said that China should build an effective and
progressive tax system to redistribute the income of the rich and improve wage
subsidy systems to aid low-income households. If necessary, the authorities
could even implement negative income taxes to help the poor and establish
special insurance for the disadvantaged.
His opinion was echoed by Wu Jinglian, a renowned economist also at the
forum.
"We need financial innovation at a higher level," said Wu. He was referring
to the idea that the authorities need to ensure the long-term stability of the
Chinese economy, which has been expanding rapidly over the past few years, but
has also encountered many challenges to sustained growth.
China is undergoing a drastic transition from an agriculture-based and
planned economy to an industry-based and urbanized market economy, he said.
"If the resources used to be controlled by the few with power, it should no
longer be so," said Wu. The market mechanism should start to function well on
the basis of an improved legal and regulatory environment and fair and upright
implementation of the law.
But China still has much catching up to do, as medical insurance and social
security schemes have not yet been established and necessary financial policy
innovation is insufficient, Wu said.
Such issues are of common concern for both economists and government
officials. Apart from labour and social security issues, banking reform is
another top priority for China.
To solve the high NPL ratio at banks, the Chinese authorities have tried many
measures including reducing NPL to professional asset management companies,
seeking private investors for the banks and infusing them with fresh capital.
But as China further opens up, such risks will increase, said Lin Yifu,
director of the China Center for Economic Research of Peking University.
Banking reform should be more thorough, with the banks themselves becoming
more efficient and relying less on government support. And listed companies
should also improve quality and give investors more returns, he said.
Xie Ping, director of the Financial Stability Bureau of the People's Bank of
China, the nation's central bank, also admitted that financial risks in the
banking sector should be better monitored and guarded.
At this time, there still remains a big regional gap in terms of financial
risks. Some provinces, for example, reported high risks in lending, which is
reflected in a high NPL ratio that may reach 30 to 40 per cent, while some only
recorded a 5 per cent NPL rate, he said.
The regulatory environment, including transparency and credit culture, also
differs among the regions. That has led to imbalanced investment and lending
structures. China should design the necessary financial tools to control the
risks and give investors in more risky areas subsidies to protect their
interest, said Xie.
