本文发表于Bloomberg Brief，2015年11月23日，转载请注明出处

Why Real-Economy Reforms in China Must Not Lag Behind Financial Sector Changes

Compared to other major structural reform programs in China, such as those involving state-owned enterprises and land, financial reform has made the most progress since the Third Plenum in 2013. One of the key reasons may be that resistance to financial reform from vested-interest groups is much milder than resistance to SOE and land reform.

The People's Bank of China has cancelled the upper limit of the yuan benchmark deposit rate, which means that the process of yuan interest rate liberalization that began in 1992 is almost complete. The central bank is promoting two other major reforms.

The first is the transformation of the monetary policy framework from a quantity-based regime to a price-based regime. To facilitate this transition, the PBC must establish a new interbank interest rate as the major policy rate, and develop a continuous and flexible yield curve. The second reform is the establishment of a national deposit insurance company that would turn the government's implicit guarantee to

commercial banks into an explicit guarantee.

The U.S. Dollar Index has been climbing since 2013 following the U.S.'s exit from quantitative easing. Because the yuan remained relatively stable against the dollar over this period, the yuan's

effective exchange rate appreciated very quickly and the currency became significantly overvalued. The PBC reformed the formation mechanism of the yuan exchange rate on August 11 in an attempt to make the opening price of the daily RMB/USD rate equal to the closing price on the previous trading day.

There is no doubt that the aim of this reform is positive. However, the yuan depreciated significantly against the dollar after August 11, and the resulting external and internal pressure pushed the PBC into intervening to stabilize the exchange rate in both the onshore and offshore

markets. The intervention seems to have been successful in the short time, but whether this will continue to be the case is uncertain.

China's government is keen to push the yuan into the International Monetary Fund's Special Drawing Rights basket of currencies, and the PBOC has introduced measures to make the yuan more widely used to help fulfill this objective. For example, the domestic government bond

market has been opened up to foreign official investors. Other initiatives include the QDII2 outbound investment program and the planned Shenzhen-Hong Kong stock link and London-Shanghai link. A PBC-dominated global RMB clearing mechanism has been established, and the central bank has adopted the IMF's new standards on the disclosure of

economic and financial data.

No doubt these measures will be welcomed by the international community, and will increase the chances of the yuan being accepted into the SDR basket.

However, despite these reforms, China's financial markets have faced a number of challenges and uncertainties. The stock market went through a new cycle of boom and bust in the past year, dealing a heavy blow not only to the wealth of middle class investors but also to the reputation of the Chinese government. The property market has continued on a downward path, exacerbating the financing difficulties and debt overhang of local governments and the balance sheets of commercial banks. Sluggish domestic and external demand and the exacerbation of over-capacity mean corporate debt deleveraging is likely to persist, and this might result in a new wave of nonperforming loans in the banking sector.

Finally, short-term capital is flowing out of the country, and this capital flow together with the depreciation of the yuan may reinforce each other and even form a vicious spiral.

New risks could arise if reforms in the real economy lag too far behind the pace of financial reform. To sustain a relatively healthy economy and fast growth and to avoid a systemic financial crisis, the government must accelerate real-side reforms in areas such as SOEs and land.

Ming Zhang is a senior fellow and director of the Department of International Investment,