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Market volatility adds buzz to annual forum

THE timing of the Lujiazui Forum, an annual event focusing on developments in the finance industry, coincides with events that offer plenty of grist for discussion.

Participants in the sixth annual forum, which began on yesterday in Pudong, are no doubt talking about the recent credit crunch in China's money markets and the steep plunges in domestic stock markets.

The formal topic of the conference - "A New Vision for Financial Reform and Opening Up" - touches on some of the factors that are believed to have contributed to recent volatility in the markets. Change and reform can sometimes be painful and unpredictable.

"China needs new wisdom and courage in pushing forward a series of financial reforms," said Xu Quan, deputy director at the Shanghai Financial Services Office. "Those reforms include interest rate liberalization, changes in setting the yuan exchange rate and the creation of a multi-layered capital market."

The 5.3 percent plunge in China's major stock market on Monday will certainly cause some buzz in the forum corridors.

It was blamed on an acute cash shortage among financial institutions, on growing investor anxiety over the resumption of new share listings and on broad worry about a slowdown in China's economic growth, economist said.

"It all raises questions for heavyweights at the forum on how to improve the financial sector to serve the real economy and to bolster weak market sentiment," said Xue Jun, an analyst at CITIC Securities Co.

Co-chaired by Shanghai Mayor Yang Xiong and China Banking Regulatory Commission Chairman Shang Fulin, the forum this year has attracted more than 550 participants, including government officials, banking executives, economists and market regulators.

The 156 scheduled speakers were meant to discuss topics such as the globalization of the Chinese currency, the building of Shanghai into a global financial center and the financial sector's role in accelerating economic reforms.

Specific issues

But more specific issues will no doubt grab the most attention.

One is the "shadow banking" sector - an unregulated, off-balance-sheet realm where wealth management products are sold at high interest rates to finance infrastructure projects. Borrowing short, lending long. If not managed properly, it is a recipe for disaster. Many economists have warned that shadow-banking risks pose a serious threat to the financial sector in China.

Some economists think the recent credit crunch in China is the People's Bank of China signaling that it won't backstop shadow-banking transactions that get into trouble.

"We hope the forum will provide useful insights into how China should manage reforms and the opening up of its financial sector," Xu said.

The role of the government may also be a hot topic of discussion.

The central bank said on Tuesday that it had injected liquidity into some banks. That seemed at variance with earlier signs that the bank won't bail out financial institutions that get into trouble because of their own misdeeds.

Tighter credit may be good medicine for banks that have run wild with cheap money sloshing through the system, but it also poses a risk for economic growth and consumer spending. Economists analyzing the situation are mixed in their opinions. Some said the central bank will continue to use instruments such as short-term liquidity operations to support financial institutions. Others warned that such support does more harm than good if the ultimate goal is to make the banking system more efficient and responsible.

Forum participants from the United Kingdom, Australia, Singapore, Germany and other countries will no doubt be listening carefully. In many parts of the world, events in the world's second largest economy have been baffling and have caused jitters in foreign stock markets.

The Lujiazui Forum, named after the financial district known as the "Wall Street of Shanghai," started in 2008 and has grown in stature as a platform for global discussions on finance, the economy and China's emergence on the world scene.




 

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