Meeting the economic challenges of the year

The government, however, still sees the number of newly registered businesses as the most important indicator of its industrial policies, and thus ignores the impact of those that go bankrupt. In contrast, China needs new ventures that thrive on real innovations, not by buying and modeling after developed countries' technologies. Innumerable research works and long-term inputs of human and material resources, along with failures, will be needed before innovation becomes one of the driving forces of China's economy.

The need for China is to show more patience while promoting innovation, because it has paid a heavy price, in terms of the environment, for the almost three decades of double-digit growth.

And third, China's market reform, in many areas, has far outpaced that in the supervisory and administrative mechanisms and exposed the backwardness of its market supervision regime. The roller-coaster ride of China's stock market this year shows that supervision and administration lag far behind the innovation of financial tools and products.

But if that is the case, why has China's financial sector been relatively on track after the US Federal Reserve raised interest rates? The answer is: because of the government's effective countermeasures and the ongoing financial sector reform.

The number and complexity of China's financial derivatives are in the primary stage. That the government has not yet lifted its control over capital account convertibility means it still has the cover to be insulated from the storms in the outside world. But China has to take measures to shield itself from future storms, which will be much more devastating.

Freedom of market and supervision are two sides of the same coin. And effective supervision is the foundation of a secure and flexible financial market, and crucial for maximizing market reform's positive effects.

Hopefully, the government will address the three issues through concrete reform this year. True reform will cause pain, instead of providing comfort, but mostly to vested interests. And economic development should benefit the people, not vested interests.

The author is chief economist with China National Gold Group Corporation. The article was first published on the website of Chongyang Institute for Financial Studies of Renmin University of China on Dec 28, 2015.