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Chinese Scholar: China Needs to Reform Its Entire Financial System Completely

On June 24, 2013, Securities Daily published an article titled “(China) Needs to Reform Its Entire Financial System Completely.” According to the article, in recent years, China’s capital assets reserve has been increasing too fast. China has become the country with the largest currency reserve in the world. As of late last year, China’s broad money (M2) balance was 97.42 trillion Chinese yuan, 1.5 times that of the United States’ M2 and close to a quarter of total global money supply. By the end of May 2013, China’s broad measure of money supply (M2) reached 104.21 trillion yuan. However, the effect of increasing loans to stimulate the economy is getting worse as domestic enterprises are facing high costs and a sluggish external demand from overseas.

China has separated its financial system from the real economy for years. A bubble has been growing in the virtual economy as China’s commercial banks have been loaning money to large enterprises that have the government’s backing. On the other hand, the private SMEs (small and medium enterprises) that do not no have such backing and collateral have to rely on the private lending market, a “shadow” lending market that charges high interest rates. Burdened with such high interest loans, the SMEs have a low return on investment and are thus declining.

Source: Securities Daily, June 24, 2013