Expert advises prudence in financial innovation

Updated: 2011-11-30 11:09

By Gao Changxin (China Daily)

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SHANGHAI - China should take lessons from the global financial crisis and tread a fine line in developing and globalizing its financial system, Lu Hongjun, president of the Shanghai Institute of International Finance, said on Tuesday.

In a speech at the Eighth Conference on International Financial Centers, Lu said that while financial innovation is essential for China's economic development, policymakers should be especially prudent in promoting innovations.

"Any financial risks could have a much bigger impact in China than in other, smaller countries, given the size of its economy and population," Lu said.

"Though China's financial sector has long lacked innovation, policymakers should keep a sense of conservatism in mind in seeking progress."

China has been making strides in recent years to globalize its financial system. Most noticeable is the internationalization of the yuan as part of the plan to include the currency in the International Monetary Fund's special drawing right and, over a longer term, become one of the world's reserve currencies.

The country has promoted the use of the yuan in the settlement of international trade, leading to the rise of Hong Kong as a major offshore yuan center. Meanwhile, pilot programs were launched to make the yuan convertible under the capital account in certain circumstances.

In 2009, securities regulators also introduced short-selling mechanisms in the nation's stock markets, setting the ground for the birth of the hedge fund industry. Last week, the Shanghai Stock Exchange issued detailed rules on margin trading and increased the number of available stocks from 90 to 285.

Lu said a lack of conservatism on Wall Street brought on a "global tragedy". Reckless financial innovation and promotion of financial freedom in the United States gave rise to excessive high-leveraged speculation.

"If the 20th century was a century of financial freedom, then the 21st century will be a century of financial conservatism," said Lu.

For China, Lu said, policymakers should keep several factors in mind when opening up the country's financial system over the next 30 years.

Specifically, the country's foreign exchange reserve should be kept at a reasonable size to buffer potential financial turmoil. Meanwhile, the government should set targets on credit growth and make reasonable plans on inflation and economic growth.

"The advantages of financial conservatism have been shown in China during the Asian financial crisis in 1997 and global financial crisis in 2008," said Lu.

"Going forward, policymakers should stick to this principle when setting the country's overall financial strategy."