China's economy and financial system face a great many challenges this year. For the financial system,in my opinion,they fall in the following areas:

First,there are issues concerning confidence and market expectations. Confidence is especially important but for some investors,confidence in China's economic and financial soundness has been badly shaken.

Confidence comes not only from positive government efforts to stimulate the economy. It requires transparency and credibility regarding policies. Improved macroeconomic indicators are also important,particularly after the economy appears to have bottomed out. If there is no solid turnaround after a bottom has been reached,expectations can hardly reach a clear turning point.

Second,there are exchange rate and capital flow problems. What is the appropriate level for a nominal exchange rate? What shifts in capital flows are taking place? Making appropriate policy decisions based on this information requires strong professional skills and practical experience. If we look back at the experience of the renminbi's nominal exchange rate during the Asian financial crisis and the subprime crisis,and we consider that the Chinese economy is now at a critical stage,it appears to be more appropriate if we ensure a relatively stable nominal exchange rate and maintain a framework of strict capital management. Meanwhile,we need to control the effective exchange rate in a reasonable range with the help of foreign trade,tax and fiscal policies as well as other tools. In other words,exchange rate and capital management policy changes should be conducive to reducing excess capacity,cutting inventories and lessening leverage in the economy while lowering costs to businesses.