Beijing's lingering concerns for Washington's macroeconomic policy

Xi told Biden recently, so did other key Chinese voices in the past year

With inflation high in the United States and Jerome Powell nomination to stay as the U.S. Federal Reserve Chair, one line from President Xi Jinping’s reported remarks to President Joe Biden, which so far caught little attention in English, stands out to your Pekingnologist:


It is necessary for China and the U.S. to maintain communication about macroeconomic policy, support the recovery of the world economy, and prevent economic and financial risks. The U.S. should pay attention to the spillover effect of domestic macroeconomic policies and adopt responsible macroeconomic policies.

Not sure how that communication has been going on behind the scenes, but in the past year or so, key Chinese officials, former officials, and scholars in economics have publicly highlighted their concerns for Washington's macroeconomic policies.



Guo Shuqing, Party Secretary of China’s central bank and Chairman of China’s banking regulator

2020年 8月16日 《求是》

On Seeking Truth, the Party’s theoretical journal, on August 16, 2020


Many countries in the world, especially the most developed countries, currently adopt strong stimulus practices. Some countries implement unlimited quantitative easing (QE). As a result of the fiscal and monetary measures, abundant liquidity is available for the market, and direct financing or guarantees are provided for individuals and companies. In the short term, this approach helps stabilize the economy and finance but brings greater uncertainties in the mid-and long term. There is no free lunch in the world, and all good things come to an end. In the international monetary system dominated by the U.S. dollar, the unlimited QE, which is unprecedented, actually undermines the credibility of the U.S. dollar, erodes the foundation of global financial stability, and will result in unimaginable negative effects. Emerging economies may face multiple difficulties such as imported inflation, dwindling foreign currency assets, exchange rate and capital market volatility. What’s worse, the world may again be pushed to the brink of a global financial crisis.

2021年3月2日 国务院新闻办新闻发布会

March 2, 2021, press conference of the State Council Information Office


Developed countries including European countries and the U.S., countries hard hit by COVID-19, and some developing countries have adopted proactive fiscal policies and extremely loose monetary policies. It is understandable that these measures must be adopted in macroeconomic policies to stabilize the economy. However, more considerations must be given in terms of intensity and implications, because there will be some side effects. These side effects are have gradually appeared. Take financial markets as an example. The financial markets of developed countries in Europe and the U.S. are running high, which is in serious contradiction to the real economy. The financial market should mirror the situation of the real economy. If there is too great a gap between the two, problems will occur, and adjustment is required sooner or later. Therefore, we are highly worried about when the financial market, especially the foreign financial asset bubble, will burst.


In 2020, China registered positive economic growth, which promoted the economic recovery in neighboring countries and its major trading partners and prevented the world economy from sliding towards a greater economic downturn. China has supplied about half of the world’s final products for a long period of time, without increasing the FOB prices for exports overall. This has laid a firm foundation for the world’s fight against the pandemic and economic recovery. If we say the big flux of currency issued by the most developed countries are the driving force for global inflation – if that is the case – then the commodities made by numerous workers in China are the anchor for stabilizing global inflation.

6月10日  在2021年陆家嘴论坛上的发言

Speech at Lujiazui Forum on June 10, 2021

In response to the pandemic unseen in a century, developed countries successively launched super economic stimulus packages since 2020. Alongside the fierce fiscal expansion, monetary policies have seen an unprecedented level of looseness. The balance sheet of the U.S. Federal Reserve has nearly doubled, that of the European Central Bank has expanded by more than half, and that of the Bank of Japan has expanded by more than a quarter. Indeed, these extraordinary measures play a role in stabilizing the market and soothing public sentiments in the short term. However, the attendant negative effects are shared by all countries worldwide.

First of all, the prices of financial assets and real estate in developed countries have generally increased significantly. In particular, the stock markets quickly hit record highs. As experienced hikers may know, the steeper the mountain, the harder it is to ascend, and it is even harder to go down.

Second, inflation takes place, as if according to a plan. Moreover, it runs at a higher level than our counterparts in the U.S. and Europe expected. As for the duration, it does not seem to be as short as many experts predicted.

Third, when fiscal expenditures are largely met by the central bank’s money-printing, it is like a plane caught in a spinning vortex in the air, and it is hard to break free by itself. The Fed’s balance sheet was merely over US$800 billion before 2008 but now reaches nearly US$8 trillion. In addition, the ratio of U.S. federal liabilities to GDP beats the record set during World War II.

Fourth, many uncertainties hang over the COVID-19 pandemic at this stage, and the global industrial chain and supply chain still face the high risk of partial obstruction or breakdown. It is necessary for all countries to work together and overcome difficulties, but a few developed country/countries instead keep causing troubles and pursuing unilateralism in line with its/their so-called (XXXXXXX) First. In fact, this harms the interests of their own people first. For example, retaining high tariffs on products from China objectively aggravates inflation.

Fifth, due to the spillover effect caused by the U.S. and European countries, emerging market economies and developing countries have no alternative but to take painful countermeasures. The central banks of Russia, Turkey, and Brazil raised interest rates, and some advanced economies also began to send signals of slowdown. From the perspective of the global macro-economy, it is hard to draw conclusions on the pros and cons of these policies as of now.

(To be sure, Turkey recently cut interest rates and is now battling a nose-diving lira.)

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Zhou Xiaochuan, former governor of China’s central bank, at Boao Forum for Asia Economists Roundtable 2021, Sept.15, 2021

Fifth, we need to closely watch the development of inflation and asset bubbles and the impact of QE. With rising CPI and record-high asset prices in some countries, there are mounting concerns over inflationary trends, lower or even zero interest rates and prolonged QE with its potential negative repercussions. For example, asset prices might have deviated from the real economy fundamentals. Rising costs for housing as well as public and quasi-public facilities and services are making the measurement of inflation more elusive. Meanwhile, prices for global primary products and ocean shipping freight rates have experienced unusual rallies. Under these circumstances, every move by the Fed is in the spotlight as it sits at the helm of the biggest economy in the world. Furthermore, people are increasingly concerned about whether printing money as needed to fund fiscal deficit as suggested by the MMT would do any harm. As an old Chinese saying goes, do not expect pennies from heaven. Otherwise, one might be daydreaming. Whether there will be pennies from heaven or not, we will see by ourselves how it turns out as it underlines an important macroeconomic phenomenon with global implications.


原财政部长楼继伟 8月9日全球财富管理论坛

Lou Jiwei, former Minister of Finance, at Global Asset Management Forum on August 9, 2021


Economic recovery may cause inflation. Extremely loose fiscal and monetary policies adopted by various countries are necessary - QE led to an increase in capital prices and higher debts. There haven’t been big price increases when the economy remains depressed. However, once the economy begins to recover, the normal recovery of demand will lead to inflationary pressures, starting with the increase in commodities prices which are indicative. We are already in such a situation now.

How to predict inflation? Will we have stagflation like the 1970s? That’s a possibility indeed, but its intensity and manifestation will be different. Stagflation in the 1970s was mainly caused by supply-side problems. High taxes, high expenditures, and excessive regulation. For example, former U.S. President Richard Nixon even froze prices and wages at the time. Of course, OPEC countries prompted a sharp increase in oil prices. Under such circumstances, the response of loose monetary policy could not solve the structural problems on the supply side. Instead, it only resulted in increasing prices and caused stagflation.

During the COVID-19 pandemic, severe supply-side problems exist. The loose fiscal and monetary policies are adopted mainly to ease difficulties. Once the economy begins to recover, some policies can be gradually phased out. For example, China has begun to unwind its fiscal stimulus. Comparatively speaking, bigger problems lie in the high leverage ratio and reverse globalization. Reverse globalization undermines efficiency. If the leverage remains high, it may broadly collapse, which will be a disaster. Under such circumstances, various countries have adopted prudent policies. China stresses that it will make no sharp turns in fiscal and monetary policies, and continue to deleverage. People in the U.S. are discussing when to Taper, namely how to withdraw slowly.

Therefore, everyone should be acting prudently, so we will not end up like the 1970s. Excessive liquidity causes inflation, and it may also result in stagflation, but it’s unlikely to see a Great Stagflation as the one in the 1970s. These are my primary views.

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Yu Yongding, Academician with the Chinese Academy of Social Sciences and former Member of the Monetary Policy Committee of China’s central bank, said in an event hosted by China Finance 40 Forum in November 2021





债务是必须偿还的,否则就必须把债务货币化。很难想象美国政府如何在不进行债务货币化的情况下偿还如此巨大的债务。公共债务货币化可能会对通货膨胀和汇率产生巨大影响,我们也不能排除美国政府债务违约的可能性。虽然实施QE和零利率政策有其必要性,但无论如何,这种政策对通货膨胀和汇率的影响令人担忧。总而言之,如果美国政府继续执行当前政策而不能顺利退出QE,考虑到通胀和美国政府债务违约的可能性,从长期看,外国投资者还将可能面临美元的大幅贬值。另一方面,如果美国退出QE,发展中国家就将再次面临“退宽恐慌”(taper tantrum)。


在布雷顿森林体系下,发展中国家由于金融系统的脆弱性,不得不积累大量外汇(主要是美国国债)以保护其货币不受投机性攻击。目前,全球外汇储备总额约12万亿美元,占2020年全球GDP的14%。如此规模的外汇储备对发展中国家来说,是一种巨大的资源浪费;但如果没有这层防火墙,来自国际投机者的攻击,就可以使发展中国家几十年来的经济成就付诸东流,亚洲金融危机就是典型案例。 如果能更好地监督和管理跨境资本流动,金融危机的发生几率就会减小。我们应该制定一些规则以减缓跨境资本流动的速度,比如禁止某些高频交易,对某些类型的跨境资本流动征税等。近年来,不正当资金流动已经成为国际上高层政策讨论的热门话题。我们需要采取更加协调一致的行动,将限制不正当的跨境资本流动纳入全球金融体系改革的议程中。

The U.S. faces is facing the dilemma of debt default and debt monetization

This year marks the 50th anniversary of the dissolution of the Bretton Woods monetary system. Compared to the Bretton Woods system, the current international monetary system is characterized by the dollar standard, in place of the gold standard. As a legal tender of a country, the U.S. dollar can be supplied endlessly. For a country that issues the reserve currency, it is extremely hard to resist the temptation of resorting to printing money for its domestic interests. The only way to prevent the U.S. from doing so is its willingness to act in a responsible manner. The U.S. has been willing to act in a responsible manner, and global investors also believe that the U.S. will do so. Because of this – and just because of this – the current system has been in place for 50 years.

Initially, the U.S. provided “international liquidity” through capital account deficits, but after the early 1980s, the U.S. provided “international liquidity” through current account deficits. The net foreign debts of the U.S. have reached $15.4 trillion, accounting for about 70% of its GDP. We can’t help but ask: How long will this situation continue where all other countries accumulate the IOUs from the U.S.?

Beanstalks only in a fairytale reach up into the clouds. In a sense, the world is facing the “Triffin dilemma.” At this stage, if the U.S. wants to improve the current account balance, it must let the dollar depreciate. If other factors are considered, such as the mounting public debts of the U.S. and the continuous printing of money in the form of quantitative easing (QE), the situation be even worse. According to the Congressional Budget Office, in current estimates, the U.S. federal debt rises to 200% of its GDP by 2050. [195%, to be exact.]

Debts must be paid. Otherwise, debts must be monetized. It is hard to imagine how the U.S. government can pay off such colossal debts without monetizing them. The monetization of public debt may exert a huge impact on inflation and exchange rates, and we cannot rule out the possibility of the U.S. government’s default on debts. Although there are necessities to implementing the policies of QE and zero interest rate, the impact of such policies on inflation and exchange rates is a cause for alarm. Overall, if the U.S. government maintains current policies and does not withdraw from QE smoothly, foreign investors may face a substantial depreciation of the U.S. dollar in the long term, given the possibility of inflation and default. On the other hand, if the U.S. withdraws from QE, developing countries will again encounter the “taper tantrum.”

(we should) Incorporate restrictions on improper cross-border flow of capital into the reform agenda of the global financial system

Developing countries had to accumulate a wealth of foreign exchange (mainly U.S. Treasuries) to protect their currencies against speculative attacks, due to the vulnerable financial system. At present, the global foreign exchange reserves total about $12 trillion, accounting for 14% of global GDP in 2020. Such huge foreign exchange reserves are a colossal waste of resources for developing countries. However, in the absence of this firewall, economic achievements made by developing countries over the past few decades could vanish from the attacks by international speculators. The Asian financial crisis was a case in point.

If we can better supervise and manage cross-border flows of capital, the probability of a financial crisis will decrease. We should draw up rules to slow down the cross-border flows of capital, such as banning certain high-frequency transactions and imposing taxes on some types of cross-border flows of capital.

In recent years, improper capital flows have become a trending topic in high-level international discussions of policy. We need to coordinate our actions and incorporate restrictions on improper cross-border flows of capital into the reform agenda of the global financial system.

(Zhixin Wan is responsible for the copyediting.)