1. China’s financial industry today faces five major issues: the first is the issue of RMB one trillion, the second is the issue of RMB 10 trillion, the third is the four-six issue, the fourth is the two-eight issue, and the fifth is the 6,000-point issue. The issue of RMB one trillion refers to the foreign exchange reserve, which has actually surpassed the mark of RMB 1.3 trillion. The issue of RMB 10 trillion refers to the excess liquidity, which means deposits have exceeded loans by RMB 12 trillion. The four-six issue refers to the uneven regional distribution of financial resources. In other words, the east region claims 60 percent while the central and west region together claim 40 percent. The two-eight issue refers to the uneven urban-rural distribution of financial resources, with the urban areas accounting for more than 80 percent and the rural areas for less than 20 percent. The 6,000-point issue refers to the fact that the stock market has reached the 6,000-point mark.

　　2. The core step to solve the five major issues is to solve the excess liquidity. Trade surplus, hot money and other factors have made the foreign exchange reserve excessively high. Excessively high foreign exchange reserve has caused excess liquidity. Excess liquidity has made the stock markets excessively hot. Meanwhile, the four-six issue and the two-eight issue indicate that the current excess liquidity is a relative surplus instead of a real surplus. In the east region and the urban areas, it is a surplus. In the central and west regions and the rural areas, however, it is a deficiency. Therefore, the five major issues must be solved from their root causes and in a dialectic way. And the core stop is to solve the excess liquidity.

　　3. Solving the excess liquidity is a pressing task of practical significance. It also requires mental preparedness for a long battle. While the market should play the main roles, all the players should interact. A surplus should be turned into a deficiency, and a deficiency into a surplus. Both symptoms and root causes should be cured, and solutions should be integrated. When we say the market should play the main roles, we mean the excess liquidity can only be fundamentally solved by using market tools. When we say all the players should interact, we mean the monetary policy, the financial policy and other policies should form a joint force. When we say a surplus should be turned into a deficiency and a deficiency into a surplus, we mean the excess liquidity in the east region and the urban areas should be diverted to the central and west regions, the rural areas and the small enterprises. When we say both symptoms and root causes should be cured and the solutions should be integrated, we mean the excessively high foreign exchange reserve is the symptom and the expansion of consumption is the root cause. Only by so doing can these issues be solved in an integral way. Specifically, while the existing monetary policy should be used in a scientific way (the monetary policy should shift its emphasis from aggregate regulation to differential regulation), the following steps should be taken:

　　(1) Inputs into the rural areas and the central and west regions should be increased. In this respect, a system for the regional distribution of financial resources that combines market with government support should be established to direct funds to flow to the rural areas and the central and west regions, with the support of the appropriate financial and monetary policies.

　　(2) Consumption should be boosted. China’s social strata at the moment cannot be simply classified into “white collars” and “blue collars” as in foreign countries. They can be roughly classified into “gold collars”, “white collars”, “blue collars” and “black collars”, who are in different social strata and belong to different consumer strata. Human consumption can be classified into three levels. The first level features food and clothing consumption, a problem that has been basically solved in China. The second level highlights well-to-do consumption, mainly meeting the housing and transportation demands (houses and cars). While the housing issue has been solved for most people in China, the transportation issue is only partially solved in the urban areas. The third level characterizes civilized and wealthy consumption, which means that on top of the above two levels of consumption, the demands for education, medical care, tourism, health, culture, art and self-realization should be solved. In China, these demands are far from being solved. And they can be solved by taking advantage of the currently “surplus” funds. The specific suggestions are: raise wages and improve social welfare undertakings. Through financial transfers, the excess liquidity can be used to invest in public products, such as medical care, education and minimum living allowance.

　　(3) The excessively high foreign exchange reserve should be reduced. The policy on foreign exchange surrender should be adjusted to gradually move from mandatory surrender to voluntary surrender. The policy on investment attraction should be adjusted to restrict regions from investment attraction other than for the import of advanced technologies. While the policy on export rebate should be improved, the price policy should be adjusted to increase the corporate costs of environmental protection, energy consumption, industrial safety and wage payment, and eventually increase the cost of export and reduce the trade surplus. The sampling scope of price indexes should be adjusted and rationalized to lower the Renminbi appreciation expectation. The policy on import examination and approval should be removed and the raw materials and high technologies badly needed by China should be imported in an organized way. While overseas investment should be increased, domestic demand should be spurred to lessen the employment pressure arising from reduced export. The composition of the foreign exchange reserve should be adjusted to reduce the proportion of dollar assets. The exchange-rate reform should steadily continue so as to strengthen regulation, control the inflow of hot money and ensure the value of Renminbi is basically stable.