By Wu Jinglian

2017-09-19

Seesaw effect is a thorny problem in the implementation of macro-economic policies. “We are supposed to find out the reason why such a kind of effect could loom up and make solutions to remove it.” Prof. Wu Jinglian, senior research fellow of the Development Research Center of the State Council (DRC) put forward the above-mentioned issue at the 2017 Financial Street Forum on September 15, 2017.

There are two main goals for current economic development: one is to stabilize economic growth and prevent its deceleration; the other one is de-leveraging and curbing systemic financial risks. The two goals should be realized simultaneously whereas they are contradictory to each other. In the course of de-leveraging and preventing accumulated systemic risks, economic growth would decline; when efforts are made to enhance the smooth economic growth at a mid-to- high growth level, high leveraging ratio and more risks would pop up.

What is the reason for such a seesaw effect? The author holds that in the context of profound changes relating to current world economic performance, the function and operation of China’s financial industry have been distorted.

To be specific, after the outburst of global financial crisis, the financial sector at home once turned to demand side for a way out and bolstered economic growth through overissuing currency and expanding credit, hoping to enhance economic growth through easy monetary policy. The over-issuance of currency and the expansion of credit are bound to give rise to risk accumulation and high leverage ratio. But when the government wants to prevent risks from happening, it would adopt less expansionary macro-economic measures, which would eventually lead to the decline of economic growth and the seesaw effect would appear.

How to remove the seesaw effect? The author indicates that the fundamental way is to view the issue from the supply-side perspective and the problem will be completely solved by improving the supply-side quality and efficiency.

Against the landscape of over-issuance of currency and over-expansion of credit, the profit model of financial industry is distorted. Financial industry should play its own part in the transformation drive and improve the supply-side efficiency to serve the real economy. In his opinion, the basic function of financial industry is to allocate financial resources in an effective manner among various regions and industries according to economic performance at different periods.

Financial industry should restore its original function to realize the effective allocation and utilization of economic resources through giving full scope to the leading role played by currency and capital, and let the financial operation and products match its basic functions.

What reform measures are required to make financial industry better serve the real economy and the improvement of supply-side quality ? The author notes that the best measure lies in financial innovation. It is a very important approach for China to enhance efficiency and draw on the innovation experience of other countries and flesh out their innovate results in light of China’s conditions.

The author argues that in the new economy, the initial large sum of investments received by some Chinese enterprises with outstanding performance even in the world is from foreign countries. For instance, the seed money received by the three major Internet companies including Baidu, Alibaba and Tencent (BAT) is not from domestic financial enterprises but from foreign businesses, and this story merits our careful consideration. It proves that China’s financial industry should sum up experience to adapt to the current situation and conduct relevant reform and innovation.

The author also reveals that it is a major issue to encourage financial innovation. However, due to the information asymmetry and incompleteness of the financial market, the government needs to exercise effective supervision over the market so as to ensure its better and capable performance.