Financial reform is only way forward

Financial institutions have also strengthened their capital base and improved their business capabilities. But then, an arrow does not return once it is shot from a bow. That is why ending the financial reform policy is not an option for China. The risks exposed during the market crisis suggest that the financial system still needs to be improved.

Unless the problems are fixed, the country's financial stability will continue to be threatened.

Making sure there is a smooth transition when it comes to bringing in reforms will be crucial. During the stock market meltdown, three points emerged.

First, regulators need to be fully aware of any potential conflicts and risks in the process of financial reform.

One unique characteristic about the Chinese capital market is that government planning and market mechanism often interact with one another－forming a more complicated pattern.

In the end, reform is a process of fixing problems as you cannot expect the market to solve them all.

The second point is that there should be a top-down approach. To achieve this, certain prerequisites have to be met. For example, it is difficult to alter the speculative nature of the stock market without a registration-based scheme for new share sales.

Introducing trading, using borrowed money, in a speculative market will simply increase the risks and fuel bubbles. And we know what happens to them ... they burst.

Market volatility has also underscored the vulnerability of the domestic financial system. Liberalizing the capital markets prematurely will leave the economy open to speculative international funds. Therefore, financial reforms should be carefully designed and carried out in an orderly manner to ensure success.

Finally, the third point is that the financial regulatory system needs to keep pace with the evolving market. Activities in different sectors of the Chinese financial system are becoming increasingly intertwined.

Supervision carried out by different regulators can only cover a limited area of the entire system. This in turn has created regulatory blind spots and loopholes that magnify financial risks.

To combat this dual threat, China needs to establish a mixed regulatory system as soon as possible.

The author is the chief economist at Everbright Securities Co Ltd.