the bond market, reducing their reliance on land sales to fund expenditures. • and earlier this week, on 1 may, china replaced all business turnover taxes with a more efficient value - added tax ( vat ). but work remains in the areas of reducing off - budget spending, strengthening social spending, and refining environmental and property taxes. domestic financial liberalisation is another area where the glass is half full and half empty. a lack of depth and sophistication in china ’ s domestic financial market has limited the returns on household savings, indirectly crimping their purchasing power. it has also restricted financing to promising businesses. • china has taken the important step of liberalising interest rates. • but it also needs to develop deeper and broader capital markets. this will help better price risk capital and ensure that financing flows to more productive economic activities. china has proceeded with capital account liberalisation in a careful and systematic way, “ crossing the river by feeling the stones ”. • since 2008, the use of rmb outside china has been permitted for all current account transactions. • capital account transactions in rmb were subject to various quotas and schemes, which have been progressively expanded. • and late last year, china allowed foreign institutions to issue bonds in china ’ s onshore interbank bond market for the first time. bis central bankers ’ speeches but opening up the capital account amidst a slowing economy, a still developing domestic financial system, and a debt overhang, is no easy task. china has also made progress in reforming its exchange rate framework. • decoupling the rmb from the us dollar last year – while it caused considerable anxiety in the markets – was an important and necessary step towards a more market - based exchange rate. • the shift to a trade - weighted index for evaluating the exchange rate of the rmb will, however, take some time to gain credibility among market participants. the most decisive yet most difficult piece in the overall reform programme is the reform of state - owned enterprises, or soes. the soes have been generating lower rates of returns on investment compared to the non - state sector, and are a drag on china ’ s overall measured productivity performance. • an soe restructuring blueprint was announced last year, with the aim of improving competitiveness and efficiency but without outright privatisation, for example by consolidating similar soes or promoting “ mixed ownership ”. • this is a strong step in the right direction, but the third plenum

jose manuel gonzalez - paramo : sub - prime crisis, liquidity tensions and central banks – one year on speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the 2nd spanish capital markets forum, madrid, 30 september 2008. * 1. * * introduction ladies and gentlemen, it is a great pleasure for me to be here in madrid at this 2nd spanish capital markets forum. having very good memories of the interesting discussions and presentations at last year ’ s event, i would like to thank the organisers for inviting me again and providing me with the opportunity to share with you some views about the financial market turbulences, how we – as central bankers – have addressed them and some of the lessons learned so far. 2. the financial market turmoil : where do we stand? let me briefly recall the situation prevailing in financial markets when this conference took place last year. at the time, the market turmoil had already broken out and central banks were already engaged in interventions aiming to minimise the disruptions to money markets and to preserve the implementation of their desired monetary policy stance. in my intervention at the time i reported that although the ecb liquidity measures had had a stabilising effect on the euro money market rates at the shorter end of the term structure and, more generally, the money market had recovered some of the lost ground, market participants continued to report limited trading activity and high spreads, particularly in unsecured inter - bank term markets. banks seemed to be particularly reluctant to lend money in the unsecured inter - bank market due to uncertainty about their own funding needs, especially in usd, and lack of confidence in the soundness of their counterparties. one year later, the financial market turmoil has not yet come to an end. in fact, over the past few weeks, it has intensified again. large financial institutions have failed or had to be taken over by others, while a number of markets have exhibited increased volatility and reduced liquidity. in particular, significant tensions persist in global money markets, where market liquidity is strained and term interest rates are elevated. meanwhile, volatility has increased in other global financial markets, particularly for equities and commodities. central banks have provided liquidity to help to stabilise conditions in the euro money market and to mitigate tensions in the us dollar money market and in the fx swap markets. in addition, public authorities have announced a number of measures and initiatives to