Financial Innovation in China Must Continue, Says Treasury's McCormick

Treasury Undersecretary for International Affairs David McCormick said that China needs to continue its financial innovation during the ongoing market crisis if it wishes to maintain economic growth.

In a prepared speech delivered in Hong Kong on Wednesday, the Treasury official advised policy-makers not to "mistakenly abandon their pursuit of financial-sector innovation that has been so important to supporting China's growth in productivity and macroeconomic stability."

McCormick also said that as export growth begins to moderate, China will need to take steps to increase domestic demand.

"China's extraordinary growth has relied on exports and investment to fuel the economy, but this strategy may no longer be tenable in the face of a global economic slowdown," McCormick said. "Strong domestic demand growth, with robust contributions from the consumption and the services sector, provides the surest guarantee of both macroeconomic stability and sustained economic growth."

In addition, McCormick said China requires more flexibility in regards to its exchange rate policies, as well as for interest rates.

"Market-based pricing, including for interest rates and exchange rates, must play a central role in the process of allocating resources towards production for the domestic market," he added.

Up until 2005, the Chinese yuan had been pegged to the U.S. dollar. Since then, Chinese policy-makers have said that they would allow the currency to have more flexibility.

"The current turmoil has exacerbated macroeconomic policy challenges the U.S. and China already faced as a result of structural imbalances in both economies," McCormick added. "In the United States, our financial markets are experiencing unprecedented challenges, and this is adding even greater pressure to our already slowing economy."

By Todd Wailoo and edited by Nancy Girgis
©CEP News Ltd. 2008