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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Policy Forum 7 (March 2019)

Since World War II, Western countries have rich (but not always exciting) experience to use official development aid (ODA) to help poor countries in economic development and political reform. As seen in Figure 1, the total ODA from OECD countries in 2017 reached 144.16 billion USD, compared to 35.67 billion USD in 1960. However, a dismal fact is that no consensus has been achieved so far among economists, even after tons of efforts have been made on the effectiveness of aid. On the one hand, economists such as Jeffrey Sachs believe that foreign aid and technical support are an ideal shortcut for poor countries to improve their people’s living conditions in the areas of sanitation, healthcare and education. In his popular book (The End of Poverty, 2005), he said that “[cutting aid] amounts to a death sentence for more than 6 million Africans a year who die of preventable and treatable causes, including undernourishment, a lack of safe drinking water, malaria, tuberculosis and AIDS” and that “increased financing could help end school fees, pay for more classrooms and teachers, buy school meals that contain locally produced foods and invest in water and power so women and children do not continue to spend their lives fetching water and wood for fuel.” On the other hand, William Easterly, in his great hit White Man’s Burden, argues that foreign aid may crowd out the endogenous drive for development and worsen the institution quality. The highlighted winners from Western aid are the dictators from the “Old Boys Club” in rogue nations.

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Policy Forum 6 (January 2019)

On 13 September 2017, the European Commission adopted a proposal for a regulation establishing a framework for screening foreign direct investment (FDI) inflows into the EU on grounds of security or public order. Officially the framework serves to enhance cooperation on FDI screening between the Commission and Member States, to increase legal certainty and transparency. However, the cases and relevant statistics shown in the official documents reveal that the EU mainly focuses on the capital from China’s enterprises.

As (for example) mentioned in “China’s International Behaviors” (Medeiros 2009), China tended to contact European countries individually rather than EU since 2005. The European Commission can do nothing when China only contacts the member states regardless of the EU’s requests. However, the EU’s decision making has been unusually efficient this time (see Figure 1): the EU level FDI screening mechanism will most likely be finished in 2019, less than three years since Jean Claude Junker’s statement of “we are not naïve free traders” in 2017.

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