Increased productivity key to economic future
By Robert Blohm (China Daily)Updated: 2007-03-16 16:54
Otherwise, China cannot maintain its policy of keeping its foreign exchange
rate stable. That policy requires China's international trade and investment
surplus to correct itself through price increases in China, especially those
caused by that surplus.
If the People's Bank ultimately stops the
borrowing policy, it creates even more pressure to speed up productivity to
prevent overly rapid growth in the money supply.
This year's National
People's Congress convened the week after the China market correction impacted
the world's stock markets, an indication that China's and the world's economic
well-being are tied together.
The correction was prompted both by
Chinese concern over the health of the US economy and huge inefficiencies still
in the mainland's financial sector. This includes a still insufficient pool of
institutional investors outside of Hong Kong. State-owned companies that have
raised money in the equity market are using that same money to invest in the
equity market before they use the cash to make purchases in the real economy.
China's banks need to take the billions they've raised from the equity
market and use the money as soon as possible for a massive training program in
how to generate higher returns. This can be done by lending to the private
sector on the basis of credit worthiness and business performance. Banks cannot
just lend to the State sector on the basis of an implicit government
guarantee.
Ultimately the banks should not be lending to their largest
corporate clients, mostly State-owned. Instead, institutional investors should
do this directly through the bond market.
So it was appropriate for US
Treasury Secretary Henry Paulson in his visit to China, at the same time as the
NPC meetings, to emphasize accelerated financial sector reform in China more
than exchange rate policy change.
Besides, exchange rate policy
discussion now only plays into the hands of a Democratic Congress in the United
States. Congress is not a friend of a strengthened Chinese economy. It would
like nothing better than to use China's stable exchange rate policy as an excuse
to vote trade sanctions against China and try to use a presidential veto to its
advantage in next year's presidential election.
Robert Blohm is a
US-Canadian economist and investment banker based in Beijing. He filed this
column from Washington, DC
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