The deep roots of China’s financial conservatism

A growing theme in China’s recent policy rhetoric is the forceful contrast between economic policymaking in China and “the West,” particularly the US. Not just in the old-school “our socialism is better than your capitalism” way, though there is some of that, but more in the vein of: “we do orthodox fiscal and monetary policymaking better than you do.” Central bank governor Yi Gang wrote an impressive article in 2019 in which he laid out China’s determination to avoid zero interest rates, quantitative easing, and all the rest of it. A more recent example of the genre was a speech this month by Guo Shuqing, China’s top financial regulator; here’s a couple of samples from the official English translation:

When fiscal spending has been largely supported by money printing, it is like an airplane getting stuck in a spinning vortex: it would be very hard for the airplane to get out easily on its own. Before 2008, the Fed balance sheet was less than about US$800 billion, but it has now expanded to almost $8 trillion. Meanwhile, the ratio of the US federal debt to its GDP has surged to a record high since the World War II. …

China didn’t flood the market with liquidity while strengthening its macro policy responses. Some countries criticize that China failed to implement adequate policy responses and make sufficient contribution to global economic recovery, which is evidently a bias or misconception. In fact, China has made quite strong policy efforts.

What I’ve only recently started to appreciate is just how deep the historical roots of this kind of thinking are in China. During the civil war between the Communists and the Nationalists, each side issued its own currency in areas they controlled, so there was competition between the different monetary and fiscal regimes. The Nationalists lost that battle: their money printing to finance fiscal obligations led to dramatic hyperinflation in the mid-1940s, with triple-digit increases in the money supply and price indexes (see for instance the 1954 article “Hyperinflation in China“). After the Communist victory in the war, one of the new government’s first great accomplishments was to stabilize the currency and end hyperinflation.

That seems to have been a formative experience for many of China’s economic thinkers. Even a couple of decades later, they were still touting the benefits of a stable currency and low government debt to Western visitors. There’s an interesting anecdote to this effect in John Kenneth Galbraith’s A China Passage, his diary of a 1972 visit to China in the company of Wassily Leontief and James Tobin (I did not know about this book before but recently stumbled across a copy at my favorite bookstore in Philadelphia). Here’s the relevant passage:

The government has no external or internal debt–a loan from the Soviets negotiated at the time of the Korean war was paid off ahead of schedule in 1968. The budget operates with a slight surplus. In our discussions in Peking information on Chinese finances was provided with great precision and competence by a member of the Institute of Economics of the Academy of Sciences. She notes that “The Chinese currency is one of the most stable in the world. In contrast with some capitalist countries, no borrowing, no inflation, no devaluation.” Being, like all our hosts, impeccably polite, she did not specify the capitalist country.

One of the more engaging moments of the visit was when James Tobin, who with Walter Heller was one of the men who made the New Economics legitimate under President Kennedy, undertook to explain in response to a question why it was often good for the United States to have a budget deficit and increase its debt. He might have had it easier with Andrew Mellon.

There seems to be a pretty direct line from Galbraith’s unnamed Chinese interlocutor in 1972 and the defiantly conservative posturing of today’s top economic policymakers. With the commemorations of the 100th anniversary of the Party’s founding in full swing, there’s even more attention than usual to this history. The Economic Daily newspaper has been running a series of articles on the Party’s pre-1949 economic policies: one focuses on Chen Yun’s success in containing inflation in 1943-44, while another highlights Xue Muqiao’s achievements in stabilizing currency in 1940-41. The message from such historical arcana is pretty straightforward: the Party’s track record of steady economic management goes back a very long way.

Skeptics will be quick to point out that this kind of rhetoric is a bit incongruous coming from the country that, in the decade after the 2008 global financial crisis, engaged in one of the largest and most expansions of debt in economic history. Yet the effects of the old conservative line of thinking were visible even then. Because the Ministry of Finance was obsessed with keeping its own debt and deficit metrics under control, it ended up tolerating excessive borrowing by local governments and SOEs.

A couple of further comments on the Galbraith book: I wish it had had more of the kind of anecdotes I quoted above. On the whole it is not very insightful: he is too obviously and easily swayed by the fact that his Chinese hosts fed him well and put him in nice accommodations. He modestly announces his lack of China expertise at the opening, but does nothing to compensate for how those gaps in his knowledge kept him from understanding the context of what he was seeing (a problem that is blindingly obvious now but was clear even to other contemporary non-specialists; see for instance Martin Bernal’s 1973 review). As a result, me makes some fairly cringeworthy comments.


  1. Bit late to this one, but:

    I wonder if this feeds into Xi’s “西方之乱 与 东方之治” rhetoric. Most of the reporting on these issues focuses on the coronavirus and the failed Western response to it–it would be interesting to see if fiscal discipline as played a role here.


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