An MMT Economist Explains Why China Should Boost Fiscal Spending


Calls are growing louder for China’s government to boost fiscal stimulus regardless of high debt levels in the economy, an approach that’s drawn comparisons with an unconventional economic theory gaining popularity in the U.S.

One proponent of Modern Monetary Theory as it relates to China is Yan Liang, a professor at Willamette University in the U.S, who is writing a book on the subject. She began her studies in China and then continued them in the U.S. under MMT advocates like Randall Wray and Stephanie Kelton.

Liang argues that China’s central government has the ability to expand its spending and relieve financial pressure on local governments and state-owned companies by taking their debts onto its own balance sheet. That doesn’t mean Beijing needs to follow Washington by making direct financial transfers to households, she says. As a developing country, fiscal firepower should mainly be aimed at solving structural constraints in the economy, she argues.

She elaborated on her views in a recent interview, parts of which have been edited for clarity.

What do you see as the core insight of MMT for developing countries like China?

MMT helps us understand that financial constraints at the government level are self-imposed, and that credit is not the same as saving. This is the idea that we are not relying on private savings to finance development. It’s not that the public and private sector are competing for a limited pot of savings.

For developing countries, inflation can be less of a concern, as you have a lot of under-utilized resources such as labor that you can put into action to relieve inflationary pressure. On the other hand, for developing countries bottlenecks are more prominent.

The central bank’s funding to state-owned banks so they can refinance local government bonds and increase loans to state-owned enterprises looks a bit like debt monetization. Is that an approach consistent with MMT?

You can see the Chinese developmental state doing things that MMT would prescribe. A lot of the policy makers are not driven by economic rationales, but by politics and longer-term strategic goals, so that’s why they can avoid these short-term efficiency considerations. Loans to SOEs can bring long-term benefits, such as infrastructure creation.

A lot of times the state-owned commercial banks lending to SOEs are used as policy tools, and private companies struggle to access bank loans. There should be a better way to do it. I think there should be a separation between the private and public objectives. You could have infrastructure and job creation projects financed by policy banks to state owned enterprises, and a commercial banking sector that could pay more attention to private enterprises.

Do you think the government’s debt focus is misguided?

What needs to be worked on is private sector debt and semi-public debt. SOEs have their own balance-sheets, which are contingent government debt -- that needs to be worked on. It’s not an issue of the amount of debt but about the debt structure. That public debt can be made more explicit. The central government should take on more debt. A lot of the local level spending could be the central government’s responsibility in terms of financing.

What do you think of calls for more cooperation between monetary and fiscal authorities to keep interest rates low to help expand government borrowing?

From MMT’s perspective, if debt is in the sovereign currency then it doesn’t really matter what the interest rate is. The interest rate is irrelevant when it comes to pay-ability of government debt. But it does matter due to inflationary and distributional implications.

The idea is that increasing public sector debt increases private sector assets. If a lot of interest payments to the private sector stimulates the private sector and helps the economy and puts unused resources into use, then that’s a good thing. But a high interest rate could lead to high government interest payments, which could lead to too much private spending and hence inflation.

There’s a risk that money creation by China’s government can reduce the yuan’s international value. Is that a constraint on fiscal spending?

There are governments that give up their sovereign currencies and dollarize (e.g. Ecuador) or have rigid exchange rate pegging (e.g. Hong Kong), these governments are not “sovereign.” If China tries to peg its currency or maintain an exchange rate, that undercuts its ability to expand fiscal spending and monetary creation. The way to implement MMT in China is to maintain capital controls to preserve policy space.

But if China wants to internationalize the renminbi, then capital controls at some point need to go. That’s the dilemma. There isn’t a perfect solution.

Do you agree with criticism that China’s fiscal stimulus following the pandemic has been small relative to the U.S.?

The Chinese government hopefully realizes it’s about structural challenges in the economy. They need government spending but it’s a matter of how they spend it. I don’t think they need to spend a lot on pandemic relief, but they need a large amount of spending when it comes to structural change. For China, it’s clear it’s about reducing carbon emissions, developing technology and a switch to a more consumption-driven economy.

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