Stability amid risks

CAI MENG/CHINA DAILY

China's economic growth this year is sure to outperform the global performance. The International Monetary Fund expects China's economic growth will reach 7.9 percent in 2021. A series of fiscal, financial and monetary policies have been adopted to stabilize the economy, keep the stable development of enterprises and ensure job creation in 2020. These policies will continue to play their role this year.

Domestically, we should keep a watchful eye on financial risks. Externally, it is necessary to pay close attention to the global monetary easing, which may cause financial risks and market volatility.

The main objective of macroeconomic policy is to ensure stable economic growth. Last year, China implemented a proactive fiscal policy and a prudent monetary policy, and introduced unprecedented support measures. If economic growth continues to rebound this year as expected, the drastic measures taken last year to stabilize growth will have to be gradually phased out.

In particular, given that there is still great uncertainties about economic growth this year, macroeconomic policies should maintain last year's prudence while making appropriate adjustments. Last year's monetary policy was flexible, especially with a few policy tools targeted the real economy, but the policy orientation was relatively prudent compared with the major central banks around the world and should continue this year.

In 2020, the financial system took different measures to reduce the financing cost for the real economy by 1.5 trillion yuan ($232 billion). Therefore, relatively loose financial conditions, including low funding costs, should continue.

Financing costs for the real economy have declined over the past three years, and a continued decline this year is possible. On the whole, monetary policy will still maintain sufficient liquidity to support the growth of the real economy, with financial institutions and regulators working together to steer funding costs further downward.

But it needs to be seen that last year's policy was a temporary response to the pandemic, not a long-term strategy. After all, for financial institutions, risk-based pricing is the basic condition for sound operation.

There are still many means available for financial support to the real economy, including more use of direct financing and increased credit services, and through market-based instruments.

Support for small and micro enterprises needs to be stepped up. A large number of small, medium-sized and micro enterprises and low-income people are facing high uncertainties and are unable to meet traditional credit risk assessment requirements. Nowadays, traditional financial institutions generally make credit decisions according to offline information by bank loan officers who understand enterprises and entrepreneurs in a long-term, all-round way, and the effect is very good. But it is hard for this approach to benefit small businesses. The long-tail effect of big technology platforms such as big data, artificial intelligence and cloud computing can help solve this problem. Using big data for credit risk assessment solves the problem of risk control. However, this creates new problems. On the one hand, how can the robustness of the credit risk assessment model be guaranteed? On the other hand, how can regulators introduce relevant policies to protect the rights and interests of consumers, effectively monitor their behavior and control financial risks?

At present, the main challenge facing the financial sector is the transformation of the mode of economic growth, and the financial system has not yet fully kept pace with the transformation. China's financial system has effectively supported economic growth over the past few decades. The financial system has worked well in the past as a model of factor-input economic growth, but the shift to innovation-driven economic growth requires further financial reform, openness and innovation.

The three major aspects of financial reform include: first, increasing the proportion of direct financing and developing a multi-tiered capital market; second, letting the market mechanism play a decisive role in the allocation of financial resources; third, reforming the regulatory system to prevent a systemic financial crisis.

The opening-up of China's financial sector has, on the one hand, increased domestic competition and so improved the financial services, and on the other, it has helped the financial sector introduce better financial products, financial processes and models from abroad to better support domestic economic growth and technological innovation. At present, capital account convertibility and the renminbi internationalization may be the key breakthrough areas of financial opening-up during the 14th Five-Year Plan period (2021-25). And the degree of two-way floating of the renminbi exchange rate has been greatly increased.

At the same time, we should also pay more attention to risks. Given that the international economy is still unstable in the short term and major monetary policy adjustments by major central banks are likely to take place in the next few years, great attention needs to be paid to how to maintain financial stability while advancing financial opening-up.

The author is deputy director of the National Institute of Development at Peking University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.