In his Brookings blog of 9 March, Bernanke opines that "China faces the classic policy "trilemma" of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows. Accordingly, China’s ability to manage its exchange rate may depend, among other factors, on its willingness and ability to adjust on other policy margins".
Bernanke sets up and disparages three straw men: (a) One-off massive devaluation (b) Tightened control to prevent capital outflows (c) Wait for growth to return. Instead, he advocates a better solution via proactive fiscal policies. These are designed to facilitate China's transition towards a more liberal and sustainable economic model e.g. improving social security, re-training, tax-cuts or tax-credits for innovative small-and-medium-sized enterprises, and meaningful reform of monopolistic but inefficient State-Owned Enterprises.
Says Bernanke, "There are recent indications China might be moving this direction. On Saturday, Premier Li Keqiang noted the budget deficit target for 2016 would be 3.0%, an increase from 2.3% in 2015. Mr. Li also spoke about using “mergers, reorganizations, debt restructuring and bankruptcy liquidations” to deal with “zombie enterprises”—failing state-owned enterprises supported by government assistance—and added that the government will spend $15.3 billion to help those laid off as a result. Further fiscal reform measures were announced on Monday".
Bernanke's blog appeared in the middle of the "Two Sessions" in Beijing where 3,000 provincial administrators, top businessmen and Chinese Communist Party (CCP) bigwigs met as China formally unveiled the nations's next Five Year Plan (2016-20).
At the start of the Two Sessions, Premier Li's Work Report included new fiscal policies including some along the lines mentioned in Bernanke's blog. Let's not forget that such an important national policy document is not the outcome of a last-minute drop of a hat. For months and even years before, the main thrusts of the Premier's draft Report had been extensively discussed and debated both internally and internationally with national and foreign experts.
Indeed, at the height of the global financial crisis, China's economic re-structuring in the context of her exchange rate policy had been hotly dissected and debated among leading policy formulators, thinkers, central bankers and financiers across the globe. (See Debating China's Exchange Rate Policy, Morris Goldstein and Nicholas Lardy, (ed.), Petersen Institute for International Economics, 2008, pp. 100-108 - "The Open Economy Trilemma: An alternative view from China's perspective", Jin Zhongxia,(now Deputy Director-General of the People's Bank of China, the nation's central bank).
Regardless of the origin of these fiscal insights, China-watchers should perhaps wake up from the notion that China is now "walled-in" between a rock and a hard place where the only game in town seems more and more stimulus and devaluation of the RMB. Or the notion that China's short-term growth measures are sacrificing the opportunity for the imperative of structural reform. (See China NPC Reaction: Targets point towards new focus on growth and financial stability, a research note dated 8 March, 2016 of BBVA, a global Spanish bank) Download BBVA China Flash on NPC2.
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