As China transforms its industrial structures, many enterprises are saddled with surging costs. Given that, a more relaxed fiscal policy can be deployed to offset the impact of U.S. economic downturn, and more importantly to smooth the path for transformation of the industrial structures.

Will the monetary policy be targeted at inflation?

Xie Duo: In the past, global central banks were geared up to hold down inflation. Some countries even have employed an inflation targeting regime. But in my opinion, the regime is not necessarily destined to succeed, and inflation will not be a main consideration in our decision making.

When it comes to relevant discussions of the economy, a clear line should be drawn between nominal variables and real variables. The real interest rate and foreign exchange rate of a country are determined by its national income accounts. The United States-a negative saver-should in theory have carried a high real interest rate. During the past decade, China's real interest rate should be at a low level because of constant improvements of the government, individuals and enterprises. It's the same case with foreign exchange rate. So balanced real interest rate and foreign exchange rate do not directly fall subject to decisions of the central banks.

It's therefore impossible for the central banks to manipulate the real interest rates or foreign exchange rates by giving orders on the nominal ones. What they should do is nudge the nominal interest rates and foreign exchange rates to the real ones through adjusting monetary variables when the fiscal balance or international balance of payments is under threat.

To guard against inflation and the slowdown of economic growth, how should we act on financial risks and the capital market?

Huang Yiping: Financial risks will arise in wake of a tempered economic growth. To prevent financial risks is one of the key tasks of this year. The bank reforms of China had been proceeding smoothly and its capital market is also on the rise. The non-performing loan ratio of Chinese banks has dwindled from 30 percent around the year of 2000 to the current 6.2 percent. But the rosy picture might turn this year. The profit margin of enterprises may be squeezed sharply, denting bank profits. The stock index has plummeted about 50 percent since its peak in last October. That might tarnish the asset quality of the banks. Once property prices crash, the capital chain of real estate developers will split, and the banking system of China will be mired in abyss of crisis. For the past five years, the Chinese economy had been soaring at growth rates of over 10 percent, leaving little chance for bad debt to surface. But once the economy slows down, risks will escalate. At the end of this year we will see more bad debts than at the beginning of the year. As a result, China may put hedging against financial risks on the agenda of its economic work this year as a major task.

Xu Gang: Besides inflation, the regulators should also pay attention to the asset prices, including property prices and stock prices. Last year, asset prices of the country ballooned while the CPI stayed flat. The macro-economic controls could be more effective if the central bank had swooped in and gotten a stringent handle on asset prices at that time. In the first quarter of this year, the asset prices plummeted, indicative of investors changing their prospects on the macro-economic development. If the regulators still focus on the CPI or other economic aggregates, the capital market will be ignored as a barometer of the macro-economy. So signals from the capital market should be taken into consideration for macro-controls.