Relationship between Financial System Reform and Economic Development in China

Long Ke
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Long Ke: Senior Fellow, Economic Research Center, Fujitsu Research Institute

Public Policy Review, 2010, vol. 6, issue 3, 557-580

Abstract: China ushered in the 30th anniversary of its "reform and opening-up" policy in 2008. To sum up the past 30 years of reform, while the market mechanism began to function with regards to the allocation of people and things, the allocation of money has not been rationalized because of belated deregulation of interest rates. The Chinese government must therefore pursue monetary policy reform to achieve stable growth. Meanwhile, the financial crisis has pushed the Chinese economy into a slowdown phase. The Chinese government has ramped up public spending and is implementing ultra-easy monetary policy to spur economic growth. Absent the correction of distortions in the economic structure, however, this policy mix might temporarily stimulate growth but would leave concerns over a bubble and inflation in the next phase. In terms of changing the industrial structure, policy should focus on cultivating services instead of investing in manufacturing. In this sense, the financial services industry takes on major significance. Specifically, it is important to promote privatization of state-controlled banks, recognize the market entry of private capital, and rationalize financial intermediation.

Date: 2010
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