Reforms to pave way for healthier growth

Updated: 2012-07-24 14:57


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BEIJING -- While the world at large is closely monitoring China's slowing economic growth, three reforms under way in the country should be drawing more attention.

Unveiled by the government in the first half of this year, the reforms are transforming the country's exchange rate, interest rate and private capital, and have a far-reaching influence on the world's second-largest economy.

The People's Bank of China, the central bank, adopted a string of measures since April to reshape the banking sector by widening the yuan's daily trading band from 0.5 percent to 1 percent and the bank has taken steps further to liberalize the benchmark interest rates.

Meanwhile, the State Council introduced detailed guidelines encouraging private capital investment in sectors once dominated by State-owned enterprises.

Over the last few years, China's policymakers have made slow progress in internationalizing the yuan, liberalizing interest rate and diversifying the source of investment.

Such moves represented not only the goals of China's financial reform, but also showcase its ambition to unleash the economic vitality amid the current economic slowdown as well.

Yi Gang, director of the State Administration of Foreign Exchange, said on July 21 that the yuan's exchange rate is now close to the equilibrium level, hinting that the central bank has reduced its intervention over the currency pricing mechanism.

The Chinese currency has risen by 30 percent against the US dollar since 2005 as the result of the reform on the yuan exchange rate mechanism, according to the data released by the China Foreign Exchange Trading System.

Expanding the yuan's daily trading limit is only the first step for Chinese monetary authority toward the ultimate goal - making the the yuan a completely convertible currency.

In June, China and Japan, the world's second and third-largest economies, started direct trading between the Chinese yuan and the Japanese yen in Tokyo and Shanghai, moving one step closer toward a convertible yuan.

Besides widening the trading limit of the currency, the PBOC has allowed the market to have a greater say in deciding the interest rates, with the asymmetric cuts in banks' borrowing and lending rates that narrow the net interest margin for the country's lenders.

As a result of liberalizing the interest rates, Chinese banks undoubtedly need to improve their efficiency to compete for deposits and customers, making it easier for small and-medium sized enterprises who have long been complaining about difficulties accessing loans from banks and have felt they've had to turn to illegal lenders.

In terms of encouraging private investment, China rolled out specific policies for luring private funds in sectors such as transport, energy, banking, and military technologies.

Problems have arisen in the past as the majority of China's investment came from the State-owned enterprises: heavy debt burdens on the central and local governments, more State monopolies, few investment options but in the property sector for private capital.

This time around, Chinese policymakers have showed their resolution to restructure the economy and revitalize the private sector to maintain stable growth amid sluggish external demand.

To keep growing its economy rapidly, China needs to brave heavier headwinds like rising labor cost, deteriorating external environment due to trade frictions, and over-dependence on SOEs.

Time will tell whether this year's reforms will lead to healthier and more sustainable growth.