Policy Forum

The CFDS publishes roughly bimonthly Policy Forums on current political and economic issues. Articles in our Policy Forum series are commentaries on current political issues. They reflect the opinion of the authors and – although researched to our best knowledge – are not scientific papers. If there are CFDS papers on related issues, they will be referred to in the text.

Policy Forum 12 (November 2020)

In the late 1970s, China started the path of economic reforms. China first established four Special Economic Zones in 1980 and Economic and Technical Development Zones in fourteen coastal cities in 1984. In order to attract foreign direct investment (FDI) and to encourage the development of a manufacturing export sector, the government allowed capital import with the ultimate goal to generate spillovers of management skills and technology. Outside of these zones, the government permitted the import and licensing of new technologies and capital goods to improve existing domestic enterprises. At the same time, the Chinese government reduced tariffs and non-tariff barriers on a unilateral basis and extended direct trading rights to more firms, finally allowing China to become a member of the World Trade Organization (WTO) at the end of 2001.

Since China joined the WTO in 2001, trade liberalization has significantly increased the openness of the economy. For example, in 2019, the total trade volume (imports and exports) was 31.54 trillion Yuan. (The exports were 17.23 trillion Yuan, and imports were 14.31 trillion Yuan). This corresponds to about 35% of GDP in that year (Figure 1).

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Policy Forum 11 (July 2020)

Modern Monetary Theory (MMT) is the latest fashion in post-Keynesian heterodox macroeconomics. It has left the fringes of academia and is, by the standards of a relatively new economic theory, widely discussed outside academic circles. Stephanie Kelton, one of its proponents, is the economic advisor of Bernie Sanders, twice a serious contender in the Democratic primaries for the Presidency of the United States. This essay explains what MMT is and discusses its central claims. It turns out that many of its tenets are either not new and consistent with mainstream economics or wrong. Nonetheless, MMT promotes some ideas and perspectives that should not be dismissed outright.
The Money in MMT refers to an economy with fiat money. Fiat money means that the money issued by the central bank that has no intrinsic value. While this is the norm today, money used to represent a claim on a commodity in one form or another. MMT also does not allow for any management of the exchange rate that would constrain the Government in its monetary actions, for example, due to international agreements. In the MMT world, the central bank becomes an integral part of the Government and cannot make any independent decisions. Contrary to what its name might seem to imply, MMT is not just concerned with monetary policy but aims to be an alternative to mainstream macroeconomics, not just conventional monetary policy.

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Policy Forum 10 (November 2019)

According to a recently broadcasted news report, Chinese President Xi Jinping officially announced that China should take advantage of the opportunities offered by blockchain technology. In other words, I can interpret that China will pursue RMB payment for international trade using blockchain technology. This announcement is drawing much attention as it presents very important implications during the current trade war between China and the United States. I believe that Renminbi trade settlement using blockchain technology will benefit China in many ways.

First, I expect that RMB trade settlement will contribute much to the internationalization of Renminbi which is one of the goals driven by the People's Bank of China, the Chinese central bank. Compared to the size of China's economy, which has risen to the G2 level, the share of Renminbi used in international trade settlement is only about 1 or 2%. In addition, although Renminbi has been treated as one of the IMF's SDR currencies for several years, it is undeniably true that Renminbi's status in world trade settlement is not so high. If China, the world's largest commodity trading nation, can use the Renminbi as a trade settlement currency using blockchain technology, the internationalization of the Renminbi will be easily achieved. Most of all, if blockchain technology is used, the transaction settlement records are secured by the participants of the system jointly through recording, verifying and storing the transaction information without a centralized agency. Therefore, if someone wants to manipulate the transaction record, all the linked blocks between the participants must be manipulated before creating a new block. In other words, all of the numerous blocks must be manipulated within a certain time, which is virtually impossible and therefore highly secure. In addition, the blockchain has a merit of dramatically lowering transaction costs since it is a disintermediation without going through an intermediary, and above all, it can make a significant contribution to the rise of the Chinese RMB into the world's key currency in international trade. If so, how can we overcome the trust issue of the conservation of Chinese RMB value, which can be questioned by international trade participants? It can be solved much easier than we think. After payment with the Renminbi in international trade, if the guarantee of exchange for the Renminbi used for settlement with gold traded on the Shanghai Mercantile Exchange, the other countries or companies that have received the Renminbi payment will be able to trust the Renminbi more than before.

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Policy Forum 9 (September 2019)

It is generally believed China's financial reform lags behind its economic development. The market-oriented reform of interest rates began in the late 1990s, twenty years after 1978, when the policy of reform and opening up was initially put forward. During that time, the financial system was dominated by the banking sector, a subsidized credit system which channeled household savings at low interest rates into state-guided borrowing for investment (this situation hasn’t changed much until today, unfortunately). Non-banking financial sector was negligible; state-owned enterprises have the priority to cheap credit supplied by banks, which are crucial for their survival. The People's Bank of China (PBoC) set the same retail interest rates for all commercial banks and set different lending quotas for each bank. The government took a cautious attitude toward the reform of interest rate liberalization, at least partly because in the absence of deposit insurance, intense competition among banks may lead to instability of the banking system, and hence negative impacts on the real economy.

Financial reform accelerated during the past few years. In July 2013, the PBoC abolished the control of lending rates, and in October 2015, removed the ceiling of deposit rates. However, these measures do not indicate that interest rates are fully market-determined, as acclaimed by the media at that time. Official restrictions were cancelled, but only to be replaced by hidden controls. An industry self-disciplinary mechanism of market interest rate pricing, established in September 2013 and intended to avoid disorderly competition among commercial banks, imposed de facto restrictions on nominal interest rates. Commercial banks did not get full pricing power for their funds; the central bank continues to intervene in credit allocation and issue benchmark interest rates. And the financial market is still divided, characterized as a dual-track interest-rate system: on the one hand, retail interest rates of saving deposits and loans are administratively controlled; on the other hand, most asset prices in currency, bond and stock markets—including the interest rates of interbank markets—have been liberalized. This is why the dual-track interest rate reform was launched in 2018, a new round of market-oriented reform of interest rates which aims to integrate the two tracks of interest rates: regulated and market-determined interest rates.

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Policy Forum 8 (May 2019)

Olivier Blanchard - a prominent and leading macroeconomist of the past 2-3 decades and one of the world’s most respected macroeconomists - questioned in his recent speech at the annual American Economic Association Meeting the conventional wisdom that excessive debt is a danger for governments across the world. His central point is that, on average, during the past few decades, nominal interest rates have been lower than the nominal growth rate, which is quite the opposite of what is assumed in most of the textbooks on public finance. Therefore, debt is much less of a problem than previously thought. Blanchard, specifically speaks about the US economy; however, his point is perhaps even more relevant to the Chinese economy.

China has been experiencing a quite high economic growth rate over the past two decades, and at the same time, safe government bonds interest rates have been much lower than the GDP growth rate.  They are expected to remain below nominal growth rates for a long time, at least so long as the People´s Bank of China does not forget that low and stable inflation is the central goal of monetary policy. Price stability is indeed the optimal monetary policy emerging from the new generation of models that have become the workhorse for the analysis of monetary policy, which are called new Keynesian. Therefore, so long as the inflation rate in China remains low and stable and the economy continues to grow at its remarkably high and steady rate, the Chinese government should not worry too much with the supposed costs and risks of government debt, that the rest of the world has been too obsessed with in the past few years.

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