China's reform 2014: What to watch for

The third thing worth watching for is whether the central government's fiscal policy can be effectively implemented. To maintain growth, the central government may adopt some radical measures, and given the general situation, there is room for measures such as increasing deficits and issuing more treasury bonds. China has a high stock of currency but low national debt, which only accounts for 18 percent of GDP. Treasury bonds and currency are two kinds of financial assets the public want to hold in the long term. They are also needed in economic development, and have attracted a lot of interests from foreign investors who want to see renminbi internationalized. Therefore, issuing more treasury bonds to pool money for local governments will be a promising solution.

The fourth thing worth watching for is whether financial reform can be implemented without delay, and if it can match the central government's fiscal policy. Currently, the central bank appears to be in dilemma over the commercial banks' shortage of funds. On the one hand, it wants to keep a limited stock of currency to pressure commercial banks to reform, improve banking management and settle old scores and bad loans, while on the other hand it has no choice but to increase liquidity to ensure economic growth. To solve this dilemma, the central authorities should accelerate the reform of the banking system. They should allow more regional banks to enter the market, because they can immediately quench the thirst for funds as currency distributors (as a matter of fact, all commercial banks are big currency holders), and offer better services to small and medium enterprises in their regions.

The authorities should also loosen the hold on commercial banks and allow them to securitize some loans, because this will give the banks more funds, reap more benefits from financial assets and further improve the potential of the bond market.

The fifth thing worth watching for is whether the internationalization of renminbi will gather pace. With the United States withdrawing its quantitative easing policy, the renminbi will be under less pressure to appreciate. This will result in a steady growth in China's imports and exports even though the trade surplus is no longer the main force boosting the country's economic development.

The author is Director of the Center for China in the World Economy (CCWE) at Tsinghua University.

The article was translated by Chen Xia. Its original unabridged version was published in Chinese.