MMT Breaks In In China With Calls For More Fiscal Stimulus
The Chinese government is facing growing calls to reduce its debt concerns, with several influential economists arguing that authorities should follow the US game plan and borrow more to stimulate the economy.
Unlike the United States, where President Joe Biden is stepping up stimulus measures to avoid the mistakes of a slow recovery in the aftermath of the global financial crisis, Beijing is focusing on containing public debt and reducing financial risks. . China has set a modest economic growth target of “above 6%” in 2021, is aiming for a lower budget deficit and called on local governments to “tighten their belts”.
A number of economists and former advisers linked to the Chinese government say the focus is out of place, given the change in political thinking globally since the Covid crisis, as governments around the world injected record amounts of fiscal stimulus and central banks bought back debt to keep interest rates low. It is linked to the growing popularity of Modern monetary theory, although none of the economists have explicitly endorsed the approach.
“There is a new understanding of debt in macroeconomics,” Liu Lei, senior researcher at the National Finance and Development Institution, a leading government think tank, said in an interview. “Unlike the private sector, the government can continue to borrow new funds to pay off old debts. The only condition for this to continue is that interest rates remain low. “
Recent Comments from US Treasury Secretary Janet Yellen Paying more attention to debt servicing costs rather than the total level of debt “makes a lot of sense,” he said.
Rising debt levels
A similar view was expressed by Zhong Zhengsheng, chief economist at Ping An Securities, who consulted with Chinese Premier Li Keqiang on government policy last year. China should learn from the United States that close coordination between fiscal and monetary policy may be more important than financial stability, he said in April. word.
China’s official public debt is low by international standards at over 40% of GDP last year, but that does not include the large so-called hidden local government debts held by off-balance sheet financing vehicles. Authorities pledged to reduce the ratio of total public debt to GDP this year.
The International Monetary Fund estimates China’s general government budget deficit, which includes central and local governments, will reach 9.6% of GDP this year, compared to 15% for the United States
China’s relatively weak stimulus comes amid a subdued economic recovery, leading some analysts to revise downward their growth forecasts for this year. In the United States, GDP projections are raised.
Divergent fiscal trajectories also have long-term implications, with the United States being the only country with higher GDP by 2025 than expected before the pandemic, according to projections by the Organization for Economic Co-operation and Development. and the International Monetary Fund. This could possibly delay the date when China should surpass the United States in size.
What Bloomberg Economics Says …
“The Chinese government is right to stimulate less, given the recovery since 2H 2020. In other words, the recovery allows China to do so. The United States is in a different situation than China, as the economic recovery is slow. Also, I think most governments will consider cutting back on fiscal stimulus in the coming year when the pandemic is under control and their economies recover. China is right in front of them.
David Qu, Chinese economist
Beijing’s conservative stance stems from its experience in the aftermath of the global financial crisis more than a decade ago, when it unleashed a stimulus blitz that fueled the expansion of the economy and raised levels of economic growth. indebtedness. Asset bubbles and unnecessary investments fanned worries of a “Minsky Moment”, where the market collapses due to unsustainable credit growth.
In 2016, President Xi Jinping’s chief economic adviser Liu He led a shift to tighten credit in the economy, causing GDP growth to drop to 6% in 2019, before the pandemic hit. Although the government increased spending and turned on the credit taps in early 2020, its fiscal stimulus measures were relatively modest compared to other major economies.
After declaring victory in the previous deleveraging campaign, policymakers can now moderate their stance on public debt, said Zhang Anyuan, former researcher at a think tank affiliated with China’s leading planning agency. .
“We should probably minimize the goal of reducing the government’s absolute leverage ratio and focus more on steering interest rates down and ensuring that debts can be extended,” said Zhang, who is now Chief Economist at China Securities.
The latest data shows a budget surplus in the first five months of the year, with the government keeping tight control over spending, while local government borrowing has slowed.
The focus on debt is hurting the economy by limiting the ability of local governments to invest more in infrastructure, according to Yu Yongding, former adviser to China’s central bank.
“This year’s fiscal policy is significantly tighter than last year. This is wrong, “he said.” We should not be in a hurry to get out of the stimulus policy. “
The central government should issue more debt to finance local spending and buy local government bonds to lower interest rates if necessary, he said. Reflecting the approach advocated by modern monetary theory, Yu said inflation was the main policy constraint, and its persistently low rate in China shows that the economy has grown below its potential.
Inflation hit 1.3% in May and has averaged 2.1% over the past 5 years, below the government’s 3% cap.
Yu has been critical of fiscal conservatism in China for years, but his views have gained little popularity in Beijing. Officials have explicitly rejected a proposal to implement quantitative easing by asking China’s central bank to directly buy government bonds last year.
“Why not use an expansionary fiscal and monetary policy to increase the growth rate?” He said. “If you see an increase in the CPI and an increase in financial vulnerabilities, then you stop. “
– With the help of Tom Hancock, Yujing Liu, Yinan Zhao and James Mayger