Credit-based loaning is the right direction

The United States and the eurozone are both afflicted with debt crises, and China is not immune. That is why many Chinese financial agencies are still trying to seek money in a dropping stock market to consolidate their capital funds. The debt crisis in China leaves them no choice.

China's debt crisis is turning up in three forms.

First, China's private loan system is seriously affected by the slump of China's private companies in the global financial crisis.

Second, the mutual and joint warrant system in China's private financing market, which brings convenience to borrowers and lenders, means a Domino-effect style collapse of the financing market in a debt crisis.

Third, some large-scale enterprises are also trapped in the debt mire, making lives for their guarantors, mostly local governments, even worse.

The central bank's loose money policy dilutes the crisis and adds to inflationary pressures. The makeshift measure is by no means the fundamental solution.

China needs to construct a modern credit-based loan system to replace the old ones built on personal connections in either the official, or the private, financing sector.

It takes long time and causes discomfort, but it represents the right direction for the reform of China's financing sector. Otherwise, blindly encouraging the development of a problematic private financing market only leads the reform in a wrong direction.

Translated from National Business Daily

By Li Yang