China gets the reforms it needs

In a country as big as China where there is tremendous unmet demand for banking services and financing, shadow banking and WMPs have a useful role to play. They play a complementary role to banks and are a necessary component of an effective financial system. What is lacking is transparency and proper accounting in some cases or products.

In the process of improving transparency and governance of the TSF segment, one of the consequences, intentional or otherwise, was deleveraging as market participants adjusted to the new rules of the game. Market participants learned in June that easy liquidity cannot always be taken for granted. Though the People's Bank of China can hold a different view from other money market participants on what the appropriate level of liquidity should be, the episode should serve as an important lesson for banks and regulators alike as they prepare to take steps to liberalize interest rates.

On top of these changes, the Xi-Li leadership has introduced many other far-reaching reforms and taken firm steps to stamp out corruption, which are highly laudable moves. Reforms in the administrative and hukou (house registration) systems, energy tariff and resource pricing are among the many measures already taken, and they will lead to profound changes in the way China operates.

Moreover, the recent lifting of the qualified foreign institutional investor quota from $80 billion to $150 billion represents a major step toward capital account liberalization. It demonstrates the government's confidence in its ability to maintain macroeconomic stability under a more open capital account.

We believe that if China is successful in implementing these reforms, it will continue to enjoy many more years of strong growth and prosperity, as well as further enhance its role as a global growth driver. As the experiences of other countries or regions that have remained stuck in recession for many years indicate, stimulus alone - fiscal and monetary - can only go so far in boosting growth.

Meaningful changes must be made from the root upward. In this regard, attempts to compare "Likonomics", Li's economic policy, with "Abenomics", Japanese Prime Minister Shinzo Abe's economic policy, will not be very productive. China and Japan are in very different phases on the economic cycle. China has been growing strongly for the past few decades while Japan has been mired in recession or sluggish growth since the 1990s. Their policy prescriptions are therefore very different as they seek to achieve different objectives.

The similarity is that both recognize the significance of structural reform, without which the end results are unlikely to be realized, regardless of how big the stimulus is or how long it lasts.

The author is a senior economist with Deutsche Bank.