Interview: Chinese gov't tackling of stock market justified: Australian economist

The Chinese central government's recent intervention to stem the panic in the stock markets is justified because a strong signal needs to be sent to the markets and the government did this, James Laurenceson, deputy director of the Australia-China Relations Institute (ACRI), University of Technology in Sydney said.

In a written response to Xinhua's questions on Saturday, Laurenceson, who has been following China's economic development for years, said the usefulness of individual measures could be debated but "the overall thrust was correct".

Laurenceson then suggested that the Chinese government now communicates to investors that their measures are intended to deal with panic "not pump up share prices artificially and make them a one way bet".

Laurenceson said China's financial system remains bank-based as stocks make up just over 10 percent of household wealth and account for less than 5 percent of firm financing.

"Continuing to make progress on banking reform, as indeed the government has been doing, would also show that the commitment to financial reform remains alive and well. The next six months is an important time on this front."

In a recent article addressing the issue of China's banking reform, Laurenceson said there is no more ambitious reform than liberalizing interest rates in banking.

"It's been a hard nut to crack, not least of all because of the vested interests involved ... Yet controls on lending rates were abandoned in 2013. Then in November last year banks were given flexibility to offer up to 1.2 times the official deposit rate. That quickly increased to 1.3 times in February and then 1.5 times in May. Now there's growing confidence that all interest rates will be market-determined by the end of the year."

"We are now starting to see in banking what we saw in manufacturing in the early 1980s. Last year the banking regulator approved a trial of five privately-funded banks. In January Premier Li Keqiang personally took the opportunity to launch one of the new entrants, a venture backed by internet giant, Tencent," Laurenceson said. "Important changes are also taking place at the system level. In May China's central bank launched a deposit insurance scheme, a key step in dealing with the risks that can come from a deregulated banking environment."

He pointed out that China's banks are now more connected to the international financial system than ever before. "This is being done with an eye on ensuring that the Renminbi ( RMB) is accepted as a reserve currency by the International Monetary Fund (IMF) in a review scheduled for November. In 2010 the IMF rejected the RMB on the basis that it was not 'freely usable' for both cross-border trade and investment purposes. But a majority of economists polled by Bloomberg last month said that enough has now changed for it to qualify."

"If growth of around 7 percent is to be sustained, then markets will need to play a greater role. What's happening in banking appears a case in point," he added. Endi