Liberalizing foreign exchange rates, adjusting interest rates to fit market conditions, and overhauling the once fraud-plagued securities sector have often been cited as watershed achievements for China's decade-long financial reform campaign.
A particularly dramatic accomplishment came with the stock exchange listings for major, state-owned banks.
Agricultural Bank of China's (ABC) successful initial public offering capped an arduous process during which big banks were forced to cross a bridge from their old ways of the planned economy to modern banking practices. ABC went to the market in 2009 after tackling the bad loans that made its listing the most difficult among the Big Four banks.
(Read More: Fat Profits Over but Sunny Days Still for China Banks)
Three other big banks launched IPOs in 2004 and 2005 after the State Council implemented a reform plan in 2003 – and six years after the central bank floated the first proposal for overhauling banks.
China's financial reform campaign has indeed chalked up considerable victories, but the winning has taken time. And it appears more time will be needed before additional and necessary reform measures take root.
China's economic model is still rooted in a national policy that relies on exports to pull up growth. It's a policy coupled with a government rule that all foreign currency earned by companies must be turned over to the central bank, and tight restrictions on Chinese companies and citizens who want to invest abroad.
Market Cracks
IPOs transformed the state-owned banks by introducing them to corporate governance and external oversight, and ushering in transparency. Rapid economic growth in China also helped these banks join the ranks of the world's 10 largest banks by assets and profits.
And even while banking reforms took shape, in China's macroeconomic landscape started cracking from the strains of overheating.
Recent woes for the real estate market offer clear reasons why reforms are needed to improve macroeconomic conditions. The problems are multifaceted, and neither monetary nor policy adjustments can offer fundamental solutions.
(Read More: Chinese Bank Stocks Dumped on Tighter Regulations)
Some say a property tax could be a silver bullet that ends real estate speculation and changes public perceptions toward investing that have contributed to an overheated market. But the tax may be impossible to impose unless the government steps up efforts that force officials to fully disclose their assets, including real estate.
In lieu of a property tax, the government's real estate price control policies so far have revolved around taxing transactions, making it harder to obtain property loans, and raising fees. But some measures have been counterproductive.
Rising home prices tell just part of the story of the rising cost of living in China. The central bank says controlling inflation is one of its primary objectives, and the official consumer price index suggests the controls are working. But the broad money supply M2 has grown rapidly in recent years, making it easy to blame the central bank for high levels of liquidity and rising prices.
(Read More: China Still the World's Best Housing Market - Really?)
Money growth has been accompanied by an influx of hot money, while exports have rapidly increased the government's foreign exchange reserves. The central bank has done its best to mop up capital inflows by using open market tools such as central bank notes, differentiated deposit reserve ratios for commercial banks, and creating a "pool" to accommodate short-term hot money. Experts say these tools have achieved few results.
The central bank is slowly moving toward mechanisms typically found in a market economy, where the cost of capital is related to interest and exchange rates. This mechanism lets market players make their own decisions.
The central bank has cleared a path for market-based interest rates by liberalizing rate ceilings and letting deposit rates float within a narrow range. The bank has thus signaled that monetary policymakers plan to change so that eventually they only set benchmark interest rates.
In 2005, the State Council gave the central bank permission to start exchange rate reform. That led to long discussions over technical details, such as whether to reform exchange rates step-by-step or with a single jump. Eventually, the exchange rate was allowed to fluctuate, and in 2010 the fluctuation range was widened.
(Read More: China's Central Bank Drains Funds, Again)
Meanwhile, based on various experiments tied to capital account liberalization, policymakers have encouraged the yuan's liberalization.
Nevertheless, the exchange rate's band should be further expanded, and the exchange rate regime should gradually change to reflect the market, said Yu Yongding, director of the Institute for World Economics at the Chinese Academy of Social Sciences.
What are some of the reform options available? Xie Ping, deputy general manager of China Investment Corp. and a former director of the Central Bank's Research Bureau, told participants at a recent financial forum that policymakers should consider liberalizing rules for overseas investing by individuals, reducing oversight by government agencies on corporate overseas investments, and establishing an international board at stock exchanges in Shanghai or Shenzhen that allows foreign investors to participate.
(Read More: China's 'Internationalization' Won't Be Painless: WTO)
Reform supporters remain wary, however, about free yuan convertibility. In December, for example, central bank Governor Zhou Xiaochuan wrote in an op-ed piece for Caixin that he favors central bank risk management in the course of yuan exchange rate liberalization. He also said he supports institutional management of short-term, speculative capital through measures such as a Tobin tax on currency conversions, monitoring cross-border capital flows, reviving certain exchange rate controls in emergencies, and prudent management of external debt.
And what Zhou says matters: Although key monetary decisions are made by the State Council, the central bank has grown more independent over the course of Zhou's 10 years as governor.
Indeed, Zhou drafted the bank reform plan that gained traction in 2003. He also proposed reforms in 1997 and 1998, when he served as president of Construction Bank of China under then-Vice Premier Zhu Rongji.
More Challenges
Last fall, a report issued by the Communist Party's 18th National Congress made little mention of financial reform but included several references to accelerating development of a multi-level capital market, steadily promoting market-oriented interest and exchange rate reforms, and gradually achieving yuan capital account convertibility.
The party's report was consistent with the content of the government's 12th Five-Year Plan for the financial sector, which was unveiled in 2010.
(Read More: A New Relationship: China's Xi Meets US's Lew)
But more can be done. World Bank East Asia and Pan-Pacific Lead Financial Sector Specialist Wang Jun said at the 2012 Caixin Summit that future reforms should focus on pricing mechanisms.
Wang supports reforms targeting market-oriented interest rates, widening the band for exchange rate fluctuations, and moving toward capital account convertibility. What's also needed, he said, are deep-seated structural reforms in the financial sector with the goal of fully commercializing financial entities.