Development is purpose. Reform is driving force. And stability is the prerequisite. The relations among the three are one of the most important relations that China must properly handle in its modernization, as shown by the experience drawn from the country’s fast development since the late 1970s, as well as the development of other emerging market economies.
The significance of the three-factor relations is also applicable to the financial sector. Serving the real economy is a basic purpose of finance. Financial reform is to let the financial sector better fulfill this purpose, and the prevention and control of financial risks are important prerequisite conditions for the development of finance and the success of financial reform.
To some extent, stability is much more important to the financial sector than to other aspects of the economy. Especially in the emerging market economies, where the financial system is underdeveloped or too weak to resist a crisis, financial reform must be prudent and always prioritize the stability of the whole financial sector.
Since reform and opening-up in the late 1970s, China has made remarkable progress in financial development and reform, constructing a comparatively complete structure of a modern financial sector and an effective supervisory and administrative system. This has boosted the fast growth of China’s real economy for 30 years and helped the country overcome the global financial crisis in 2008. In 2014, the financial industry accounted for 7.38 percent of China’s gross domestic product, and of the world’s top 10 banks, four are from China.
The Chinese government carried out reforms in the banking industry, interest and exchange rate markets, the macro control system and financial supervisory mechanism, over the past 30 or so years. The reformers always bear in mind that stability of the financial sector is an important prerequisite condition for financial reform, as there are so many examples of failures in financial reform abroad. Once financial stability is in question, all achievements obtained in previous reform might be lost overnight.
Maintaining financial stability is an overwhelming task. The reformers must not think that China may be an exception or less vulnerable to the risks, and must always be ready to resolve the challenges and troubles ahead. The success of reform sometimes is determined by the way reformers monitor, verify, manage and control risks.
Innovation always comes with risks and uncertainties. But it does not mean the innovators should ignore the risks. Instead, effectively managing and controlling the risks can guarantee them to press ahead with reform and innovation. Otherwise, the risks will strangle reforms in the cradle.
No matter what difficulties appear, the government must keep operations of the capital and currency markets transparent, stable and healthy, and continue with financial reform. The problems with the Chinese financial market are not caused by its overdevelopment, but underdevelopment.
In this process, the government must fulfill its legally-bound duties as a watchdog and referee, to ensure its fairness, justice, transparency and openness. If there are big fluctuations in the market, the authorities must take immediate and concrete action so as not to waste the golden opportunity of effective macro control.
It is necessary and justified for the government to intervene with the financial market to maintain its stability through urgent measures, in emergency cases. Some of the makeshift measures are impromptu, and should not be interpreted as a signal of long-term actions, suspension, or even retrogress, of reforms, or changes in development direction.
The difficulties appearing in financial reforms are inevitable. Overcoming these difficulties is, in itself, a process of self-correction and shows the progress of reforms.