IMF official: financial reform has to focus on real economy

IMF deputy managing director Zhu Min gives speech on the Sixth Asian Financial Forum on Jan 15.

The financial reform has to serve the real economy instead of finance itself, otherwise the bubble will burst again like 2008, said an International Monetary Fund official on Tuesday.

“The nature of financial system is to serve real economy. People reach this agreement after the global economy crisis, Speaking at the Sixth Asian Fiancial Forum, IMF deputy managing director Zhu Min said.

“Consumption-driven economy guarantees more stable growth, said Zhu, citing China which has transferred from an export-driven growth model to investment-driven growth over last few years. However, he added, to stabilize growth, the economy has to be consumption-driven.

The China Banking Regulatory Commission (CBRC) announced on Jan 14 that they will further improve the banking system to support real economy. They are trying to increase the income of Chinese people to stimulate consumption which is going to be the new engine of economic growth of China.

In order to increase the consumption, the IMF official pointed out the financial system of China has to serve the manufacturing sector, service, urbanization, agriculture and the aging population. The demand of the real economy will also prevent the financial system from over-swell.“If financial system is focusing on itself, the bubble can be infinitely big and finally lead to financial crisis, said Zhu.

The size of the global financial system is too big now, he said It is 3.6 times of the global GDP with high leverage. The high speed of innovation of financial products leads to untransparent trade.

The self-focusing financial system will mislead the real economy as well. Zhu said, citing the subprime mortgage crisis as an example. The financial product helps people who are not qualified for house mortgage to borrow money from the bank to buy the house. “This makes the house demand looks like increasing, but the big bubble is behind the prosperity, he said.

He also reminded the Chinese government to build up a firewall for financial system to prevent the shock of the global crisis.