Otherwise, China cannot maintain its policy of keeping its foreign exchange rate stable. That policy requires China's international trade and investment surplus to correct itself through price increases in China, especially those caused by that surplus.

If the People's Bank ultimately stops the borrowing policy, it creates even more pressure to speed up productivity to prevent overly rapid growth in the money supply.

This year's National People's Congress convened the week after the China market correction impacted the world's stock markets, an indication that China's and the world's economic well-being are tied together.

The correction was prompted both by Chinese concern over the health of the US economy and huge inefficiencies still in the mainland's financial sector. This includes a still insufficient pool of institutional investors outside of Hong Kong. State-owned companies that have raised money in the equity market are using that same money to invest in the equity market before they use the cash to make purchases in the real economy.

China's banks need to take the billions they've raised from the equity market and use the money as soon as possible for a massive training program in how to generate higher returns. This can be done by lending to the private sector on the basis of credit worthiness and business performance. Banks cannot just lend to the State sector on the basis of an implicit government guarantee.

Ultimately the banks should not be lending to their largest corporate clients, mostly State-owned. Instead, institutional investors should do this directly through the bond market.

So it was appropriate for US Treasury Secretary Henry Paulson in his visit to China, at the same time as the NPC meetings, to emphasize accelerated financial sector reform in China more than exchange rate policy change.

Besides, exchange rate policy discussion now only plays into the hands of a Democratic Congress in the United States. Congress is not a friend of a strengthened Chinese economy. It would like nothing better than to use China's stable exchange rate policy as an excuse to vote trade sanctions against China and try to use a presidential veto to its advantage in next year's presidential election.

Robert Blohm is a US-Canadian economist and investment banker based in Beijing. He filed this column from Washington, DC

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