This is related to China's financial growth model. But after we deduct the part of loans to state-owned enterprises, the financial development index shows usage that promotes financial growth, especially in improving total factor productivity or labor productivity. The expansion of financial institutions and financing methods is relatively significantly suppressed. The seriously unbalanced supply-demand relationship supports the continuous rise of asset prices. Strengthening regulation is certainly one of the means to curb the expansion of asset prices, which also appears to be the latest trend in Western countries to manage bubbles. However, considering China's national conditions, a more viable strategy is to further promote the development of financial markets to meet the needs of the public for property income and companies' financing needs. Promoting financial deepening does not contradict the lessons learned from the financial crisis.
Under the background of maintaining policy continuity and overall global recovery, next year, China's macro-financial situation is expected to maintain a "high growth, low inflation" trend. Overall, the pressure of firefighting-style macro-control will ease somewhat. In my opinion, the biggest uncertainty next year may not come from inflation but from asset price inflation. The sustained improvement of macro-finance and corporate profits will constitute fundamental support; the relatively loose monetary and financial environment will constitute liquidity support; and the global inflation expectations and the bullish expectation on China may become powerful narrative supports.
Promoting financial deepening could be an effective option to suppress bubble formation. As an emerging economic power in progress, the risk of rising asset prices in our country might be greater. At the same time, we also have advantages that mature economies do not possess, namely, through financial deepening to improve effective supply to suppress asset price bubbles. Insufficient financial depth is one of the key reasons for rising asset prices. It goes without saying that the reform and development of China's financial market have always lagged behind the real economy. Moreover, China is a high-saving country. Compared with the financing "needs" of enterprises and the investment "needs" of investors, the effective supply of the financial sector seems relatively insufficient. Therefore, traditional financial businesses and exchange-traded financial markets are not the main breeding grounds for financial bubbles, and China still has significant room for improvement in these areas.
Asset prices have rebounded considerably, but this is not enough to rule out the possibility of continued upward movement. In fact, globally, the prominent contradiction in macro-management has shifted from general inflation to asset bubbles. Bernanke was famous for downplaying the role of asset prices in macro-policy, and he became the head of the Federal Reserve based on this view. But today, after the collapse of housing and credit markets, Bernanke believes that financial bubbles might be the most difficult problem that monetary policy has faced in the last decade.
In summary, the pressure to ensure growth next year is no longer significant, given the relatively mild inflation situation, the Central Financial Work Conference does not necessarily need to focus on inflation expectations. Policy emphasis may be placed more on structural adjustments. In my view, financial deepening will be one of the important contents, which seems to have not been fully discussed yet.
Furthermore, higher requirements should be imposed on the operating stability of financial institutions. Given that adjusting interest rates would affect all sectors of the national financial system, traditional monetary policies are still lacking suitability. To guard against possible asset price bubbles and mitigate the impact they may cause when bursting, it is advisable to use supervision and regulation to limit excessive risks and ensure that once future asset price bubbles burst, the financial system can recover.
Major central banks still cannot find clear reasons to tighten under the current moderately loose monetary policy. Since the real economy is still below potential output levels, and inflation, which the monetary policy is most concerned about, does not yet pose a significant threat. The inertial characteristic of credit growth makes an abrupt halt unlikely.
The upcoming Central Financial Work Conference is just around the corner. According to existing information, there is no doubt that the active fiscal policy and moderately loose monetary policy will continue into next year. But it can be imagined that the specific content will undergo significant changes. These changes stem from some uncertainties in the future. Unlike concerns over inflation expectations, I believe that financial asset bubbles may deserve more attention.
Financial deepening is also a demand of China's economic structural transformation. There is a mystery in China: although financial development lags behind, economic growth is good. In the process of transitioning the economic structure towards service-oriented, financial deepening will become increasingly important because the government's means of allocating financial resources are becoming less flexible, making it difficult to distinguish funding opportunities and future returns.
Finance becomes an important content of structural adjustment. China's November CPI is expected to turn positive, but it is unlikely to see an inflation rate of over 4% next year. Relatively mild price conditions support the exit of monetary policy from an extremely loose state, but require its tightening to be quite moderate. New credit will decline from this year's peak but will still remain at a relatively high level.
As an emerging financial powerhouse, the risk of rising asset prices in our country "could" be greater, and insufficient financial depth is one of the significant reasons for rising asset prices. Therefore, promoting financial deepening "could" be an effective choice to suppress bubble formation. This does not contradict the lessons left by this financial crisis because traditional financial business and exchange-traded financial markets are not the main breeding grounds for financial bubbles. By improving effective supply through financial deepening to suppress asset price bubbles, we possess advantages that mature financial bodies lack.
Globally, everyone is avoiding repeating mistakes due to the premature withdrawal of stimulus policies. Many studies confirm that premature withdrawal led to multiple bottoms in USA finance during the Great Depression, and the Japanese government in the 1990s made similar errors. A report published this week by the United Nations believes that major economic bodies prematurely removing stimulus measures "could" exacerbate weaknesses in the global economy and strangle the budding recovery.
There is less controversy regarding the continuation of active fiscal policy. Advocating for the exit of fiscal stimulus from the perspective of fiscal balance lacks strong persuasiveness. The UN's model shows that this could make the global economy slip back into recession, leading to further accumulation of public debt, resulting in counterproductive outcomes. China's fiscal condition is relatively sound, and the 4 trillion yuan investment projects will still be fully rolled out in 2010, so the pace of fiscal expansion cannot stop.
China's industrial structure, dominated by infrastructure and manufacturing, does not require strong market-based financial allocation functions. This may form the concept that the economy can develop well even without a developed financial sector. Current relevant research indicates that it is not necessarily true that the more developed the finance, the better the financial growth. In fact, since 1987, the ratio of credit volume to GDP has been negatively correlated with financial growth rate, which contradicts the general theory of financial development.
From the perspective that macroeconomic policy should take into account various prices, including asset prices, monetary conditions should have more flexible adjustments, and these adjustments should exceed the needs of managing general inflation expectations. Currently, liquidity is increasingly flowing within the financial sector. Although the real economy has not yet shown obvious overheating, if asset prices rise, it is clearly also a result of excess liquidity.
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