Government determined to curb lending and bring credit expansion under control to forestall potential financial crisis

Vice-Premier Wang Qishan's recent remarks on financing at the local level highlight the central government's grave concerns about the country's financial security.

At a symposium held in Yichang, Central China's Hubei province on Nov 19, Wang said China should further deepen financial reforms and promote institutional innovations in the financial sector as a key way to limit financial risks and better serve the national economy.

"The country's future financial policies and supervision, as well as its efforts to maintain good financial market order, should center on how to effectively prevent possible systematic or partial financial risk," he said.

Wang also stressed that the country's financial system and monetary policies should play a key role in deciding the distribution of its resources in its endeavor to transform its economic development mode and promote economic structural adjustments.

His remarks came ahead of the Central Economic Work Conference, an annual high-ranking conference designed to set the tone for next year's national economic development, and are expected to serve as a guideline for the country's financial sector in the coming years.

Considering the fact that the world's current economic crises have been largely ignited by financial risks and the over-expansion of credit, it is necessary and timely for the Chinese authorities to pay greater attention to the country's fledgling financial sector.

The 2008 financial crisis in the United States, for instance, was mainly the result of the busting of a real estate bubble that had long depended on the expansion of excessive borrowing in the world's largest economy. The negative effects of such a credit expansion were amplified by the leverage of assorted financial derivatives. Similarly, the sovereign debt crisis in eurozone countries is also a result of the excessive expansion of their debt-based credit.

Likewise in China, the expansion of credit has been a basic instrument to stimulate national economic growth since 2003. Statistics show that the annual growth rate of China's bank lending from 2008 to 2010 was 3.3 times that from 1998 to 2002. In particular, as a main way to spur the growth of the slowed national economy in the context of the global financial crisis, the country witnessed a 10-fold bank lending increase in 2009 from the average from 1998 to 2002. Such a radical credit increase has not triggered a financial crisis in China, but the problems and risks caused by this unbridled lending expansion have brought the country's economy and its financial sector to a very dangerous position. For example, the inflated real estate bubbles and the huge credit risks that domestic commercial banks, the country's local financing platforms as well as the non-governmental credit market are exposed to, if not effectively controlled, could become triggers for a destructive financial crisis.

Under these circumstances, China should realize the importance and urgency of taking both short-term and long-term measures to forestall any potential financial risk. It should be aware that temporary and tactical government policies and measures cannot fundamentally defuse the ongoing financial crises in the US and European countries and that these crises are very likely to evolve into a long-standing problem.

Fortunately, Wang's remarks indicate the Chinese government is determined to curb the lending spree the country has experienced in recent years and bring credit expansion under control. His remarks have also eased people's concerns that there might be a suspension or loosening of the country's tightened regulatory measures on real estate speculation, amid calls from some market analysts and housing developers that the marginal decline in house prices in some regions warrants such actions.

But given that the external economic slowdown is not expected to have a greater influence on the Chinese economy, there is now little possibility of the country reversing its current property price regulatory measures.

The biggest danger to a steady growth of the Chinese economy is real estate bubbles. China should learn a profound lesson from Japan, who witnessed the busting of its real estate bubbles in the early 1990s and a subsequent "lost decade".

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.