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Jul 12, 2012, 08.23 AM IST
China's top financial policymakers expressed determination on Friday to push on with their campaign to reform and rebalance the world's second-largest economy even as growth cools.
Manufacturing activity in China's second-biggest economy has slowed for the past eight months, prompting expectations that regulators could dramatically loosen monetary and fiscal policies to spur the economy, as they did during the last global downturn.
However, top officials who spoke at a financial forum in Shanghai indicated they will maintain the current "prudent" policy mix, while continuing with reform.
"We will forcefully push ahead financial reforms and innovations to promote cohesive development in the economy and the financial industry," central bank governor Zhou Xiaochuan said.
The People's Bank of China will "stick to the reforms in interest rates, currency rate and cross-border use of yuan," he added.
China will also expand the financing channels available to banks, allowing them to raise funds overseas and retain higher levels of profit, Shang Fulin, chairman of the China Banking Regulatory Commission, said at the same forum.
The banking regulator is also studying the possibility of letting banks issue preferred shares, he added.
Chinese banks have been in the spotlight in the past year with investors worried that a slowing economy may increase losses from bad loans, especially after the banks loaned some 10.7 trillion yuan to local governments following the 2008-09 financial crisis.
Guo Shuqing, the top securities regulator, criticized Chinese and European companies for overdependence on bank finance. He credited the role direct financing - including bond and equity issuances - played in supporting companies in the US and the UK throughout the downturn.
Guo has been working to upgrade China's equity and bond markets but so far the stock markets have not responded positively to the winds of regulatory change. The benchmark Shanghai Composite Index is virtually flat for 2012, after falling for two consecutive years.
"Nearly all these reforms, such as boosting institutional investment, are long-term positive factors, and will not immediately push large amount of money into the market," said Cao Xuefeng, head of research at Huaxi Securities in Chengdu.
Early economic indicators suggest growth did not pick up in June, raising doubts over whether China can meet its 2012 growth target of 7.5%, a level many thought the economy would comfortably exceed when it was announced in March.
Jia Kang, chief researcher at the finance ministry, said on Thursday that the economy should stabilise in the third quarter and that the government was confident it could meet its growth target for the year.
The reform push led by the central bank and other financial watchdogs represents a change in approach by Beijing from the last crisis.
To offset the effects of the global downturn that began in 2008, China unleashed a wave of policy lending, infrastructure spending and other fiscal stimulus. It successfully revived growth but exacerbated existing structural economic distortions, encouraging real estate and stock speculation and enabling local governments to incur the USD 1.68 trillion pile of debt.
This time around, as global markets sputter and domestic growth slows again, reformers led by Premier Wen Jiabao, Zhou Xiaochuan and Guo Shuqing have seized the opportunity to make deep changes to the way the Chinese economy works.
The government is still aware of the need to maintain short-term growth, and has taken some steps to inject liquidity, including reducing bank reserve requirements three times and cutting interest rates once.
However, economists told Reuters that Beijing's ability to stimulate the economy through another massive stimulus programme is more constrained this time around given the existing debt overhang.
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