The reason fiscal policy is interesting is that it is the concrete expression of a country’s political priorities: how governments spend money tells you how they work and what their priorities are. By the same token, it is impossible to really interpret fiscal policy without some understanding of the political structure in which the government operates. There are a lot of major differences in political structure–to put it mildly–between the country I grew up in, the US, and the country I have spent my professional life in, China. One of the ones whose importance took me a while to figure out is that China is a unitary state while the US is a federal state.

This issue springs to mind every time I read assertions like this about China: “The ratio of central government debt or sovereign debt to GDP is a mere 21 percent, the lowest among the world’s major economies.” (I’m quoting from the most recent example to have arrived in my inbox, but this argument is so widespread that I don’t need to pick on anyone in particular.) It is indeed true that, if you look at statistics on government debt in China, the majority of it is assigned to local governments rather than central governments (see chart). Many people therefore contend that while local governments have strained balance sheets and limited capacity to borrow further, the central government does not.

Such a distinction would make sense if China were a federal state: if the central and local governments were independent entities with clearly defined constitutional and legal roles and separate finances. But China is not a federal state, and local governments are not separate from the central government. There is only one government throughout China; local governments are merely the authorized agents of this state. There is no constitutional or legal support for the idea that China’s local governments have any independent fiscal power and could ever be considered as having balance sheets that are separate from the central government.

It’s true that China’s government is often deliberately obscure about its true organization and structure. But some things are out in the open. Let’s turn to the Constitution of the People’s Republic of China:

Article 105. Local people’s governments at various levels are the executive bodies of local organs of State power at various levels and are the local organs of State administration at the various levels.

Article 110. Local people’s governments at various levels throughout the country are all organs of State administration under the unified leadership of the State Council and are all subordinate to the State Council.

That’s pretty clear. There is only one government in China, and the State Council, meaning essentially the executive, controls that government. As a matter of constitutional theory, local governments have power and authority only because the State Council gives it to them. The fiscal implications of the unitary state are also clearly spelled out in the Law on the Administration of Tax Collection:

Article 5. The competent department for taxation under the State Council shall be in charge of the administration of tax collection throughout the country. The national tax bureaus and the local tax bureaus in various places shall administer tax collection respectively within the limits set by the State Council. 

The local people’s governments at various levels shall strengthen their leadership over or coordination of the administration of tax collection within their respective administrative regions, and support the tax authorities in performing out their duties in accordance with law, calculating the amounts of taxes to be paid according to the statutory tax rates and collecting taxes in accordance with law. 

This is also quite clear. The authority to raise tax revenue lies solely with the central government. Again as a matter of constitutional theory, local governments’ job is to help implement the tax policies decided by the central government. They do not have any authority to raise taxes on their own, and have no independent sources of revenue.

If you look at local government budgets in China, there are two sources of funds: revenue “at the local government level,” historically 55-60% of total revenue, and transfers from the central government, historically 40-45% of the total. In reality, though, these are the same thing: money from the central government. The central government allows local governments to retain a share of the taxes that are collected at the local level. The remainder that is handed over to the central government, and the taxes collected at the central level, are then redistributed back to local governments as transfers. Ultimately all tax revenue is controlled by the central government, which decides how much money local governments get.

What’s surprising is that, in a unitary state, there could even be such a thing as local government debt. And indeed before 2010 there was not. The local government bonds that have been sold since then are a curious thing: the central government approves their issuance, so the local governments do not have any independent borrowing authority. And the central government controls how much revenue local governments have, so whether local governments can repay the debt still ultimately depends on the central government. This is a weird arrangement. The central government could just issue the same amount of money in treasury bonds and redistribute it to local governments. But for internal political reasons that I honestly struggle to understand, it is considered desirable that some of this debt be “in the name” of local governments. Even though local governments do not have any authority to raise revenues to repay the debt!

Because of this unitary structure, it makes no sense to split either the income statement or the balance sheet of China’s government between central and local entities. There is only one state in China and its finances are unified. I should point out that an excellent recent quantitative overview of China’s government balance sheet by the IMF, “Fiscal Policy and the Government Balance Sheet in China,” does not fall victim to the fallacy I criticize; the authors follow best practices by presenting their assessment on a “general government” basis, i.e. the combination of central and local governments. That’s the right way!

What all this means is that you cannot wave away the debts of local governments by saying they are local, and it’s only central government debt that matters. The central and local governments are part of a single unitary state, and the central government is in charge of figuring out how to repay all of its debt. This is precisely why it has been such a disaster for the central government to allow local governments to engage in all that uncontrolled off-balance-sheet borrowing. If China was a federal state, local fiscal incontinence wouldn’t matter too much ultimately. When local authorities borrowed beyond their means, they eventually wouldn’t pay it back, and it would just be an issue between them and their creditors without national implications. But because China is a unitary state, every time local authorities abused their power by creating unauthorized liabilities, they worsened the fiscal situation for the entire state.

Moral of the story: a unitary state needs to act like one, not pretend to be a federal state. A combination of centralized revenue-raising authority and decentralized liability-creating authority is the worst of both worlds, and the sooner China gets away from it the better.

P.S. My thanks to the excellent NPC Observer website for making it easy to track down the relevant laws.

The usual goal of industrial policy is to, by supporting or protecting a particular industry, allow it to more quickly achieve the economies of scale necessary to be competitive. China has plenty of experience with this type of industrial policy: witness how it has scaled up in the manufacturing of solar power, lithium batteries, and electric vehicles to a size that dominates global markets. But the official rhetoric on industrial policy is now turning to a different and less well-trodden path: pursuing economies of scope as well as scale. Or, to put it in less technical terms: China’s government wants to preserve and improve competitiveness in a wide range of different industries, not just specialize in the most profitable ones. It sounds like a simple change, but it’s a significant one for China’s trading partners.

As is usual in China today, the signal of this change in priorities has been delivered by the man at the top, Xi Jinping. At the May meeting of the Central Commission on Financial and Economic Affairs, one of many steering groups he chairs, Xi laid out his vision of a “modernized industrial system.” He explained that such a modernized system has three key characteristics: it is “complete” ( 完整, also translated as “comprehensive”), “advanced” (先进) and “secure” (安全). The most novel of these objectives is “completeness,” and Xi briefly explained what that objective means in practice: “We must keep promoting the transformation and upgrading of traditional industries, and not take them as ‘low-end industries’ to be simply eliminated.”

On its surface, this could sound like one of the invocations of the importance of blue-collar manufacturing jobs now common in other countries on both the populist right and left. In fact, this statement is an intervention in a specific Chinese policy debate that clearly indicates a reversal of the previous direction. China’s turn toward high-technology-focused industrial policy well predates Xi, and actually began in the prior administration of General Secretary Hu Jintao and Premier Wen Jiabao (see Barry Naughton’s excellent short history of industrial policy for more).

In the mid- to late 2000s, “upgrading the industrial structure” was a regular buzzword, and official support for “emerging” and “strategic” industries ramped up. At the same time, though, the government tried to restrict resources going to less-desirable industries, usually defined as those that are highly polluting, energy-intensive, or in excess capacity. These efforts reached a peak in 2008; here is some representative language in Wen’s government work report from that year:

It is essential to appropriately control the scale of fixed asset investment and improve the investment structure. We will maintain strict control over the availability of land, credit and market access, and pay particular attention to strengthening and standardizing supervision of new projects to ensure they meet all the conditions for launching. Haphazard investment and unneeded development projects in energy intensive and highly polluting industries and industries with excess production capacity will be resolutely stopped, and market access will be tightened and capital requirements will be increased for industries whose development is discouraged. Work on illegal projects will be resolutely stopped.

In this vision of industrial upgrading, there is both positive and negative discrimination: the government pursues policies that favor high-end industries and disfavor low-end industries. Such a vision is based on ideas of national specialization and integrated global trade. It’s influenced by the “flying geese” model originally articulated by a Japanese scholar and popular among development economists in the 1980s and 1990s. The idea is that, as nations advance up the technological ladder, they leave behind production of low-value or commoditized products, which then creates opportunities for lower-income countries to industrialize by making those goods. Nations at different income levels specialize in making different kinds of products, and by trading with each other everyone becomes better off.

Xi’s vision of “completeness” or “comprehensiveness” does away with this. Rather than allowing China’s low-end industries to shift to other, lower-income countries, and then importing those products, the idea is to maintain the ability to produce the full range of goods within China. Low-end industries are not abandoned but become targets for technological upgrading in order to preserve their competitiveness. As the Chinese economist Xu Zhaoyuan explained in an exegesis of Xi’s remarks:

We cannot allow traditional industries to transfer abroad too quickly. This requires continuous strengthening of policy support for the upgrading and transformation of traditional industries, improving product innovation and efficiency to enhance their competitiveness, while also continuously reducing the cost burden of the real economy, especially reducing various transaction costs. 

The background assumption is clearly no longer that nations can specialize to take advantage of an open global trading system, but rather that they need to minimize external dependencies and vulnerability to trade disruption. The Chinese economist Yu Yongding called it part of China’s response to the US decoupling campaign:

Re-emphasizing the importance of comprehensiveness is a reaction to the new geopolitical reality. While China cannot and should not produce everything – autarky is impossible for a modern economy – it should be able to quickly launch or increase production of critical goods, as needed.

China does indeed have a very broad range of manufacturing competence: according to Yu, “China ranked among the world’s top three exporters (by volume) in 2,400 of 4,000 categories of intermediate goods traded globally between 2017 and 2020.” More simply, there are very few goods that China does not make. I looked at China’s exports broken down by 4-digit HS code; out of 1,241 categories, there were zero exports in fewer than 50, a share that has remained largely constant over the past decade.

In a sense, then, achieving a “complete” industrial industrial system would just mean maintaining the status quo. On the other hand, as China is probably only a few years away from qualifying as a “high-income” country on the World Bank’s definition, one might expect that rising incomes would have at least some impact on China’s cost structures and competitiveness in making in different products.

As is often the case with these high-level slogans, it’s not totally clear what the practical implications of Xi’s policy shift are going to be. It would not be that unreasonable for Xi to say, “I don’t think we should have government policies that actively try to shut down particular industries, because those industries employ Chinese people and earn money and there’s just no good reason to get rid of them.” It would be somewhat less reasonable, certainly from the perspective of China’s trading partners, for Xi to say “Instead of just subsidizing the high-tech industries of the future, I think we should subsidize every single industry that China has so that China can have a comparative advantage in making everything.”

At the least, the rhetoric of “completeness” does not offer a lot of hope that other countries are going to be able to benefit from China’s growth by selling it stuff. The “flying geese” theory is now criticized, not totally unfairly in my view, for contributing to the hollowing-out of industry in the US and other high-income countries. But it did offer a basis for mutually beneficial trade with the developing world: as high-income countries lost competitive advantage in some industries, the low-income countries gained it, and could use those industries to raise their own incomes.

China these days is trying to knit together a coalition of other developing countries also opposed to US dominance of the global system. But its official economic theory does not offer much of a basis for what it likes to call “win-win” ties with other developing countries. China wants to keep producing itself all the stuff that poorer developing nations in Africa, Asia and elsewhere might want to sell it. China acknowledges a need to import necessary raw materials, and that’s about it. Is this maximum mercantilism really an attractive vision for an alternative global economic order?

As China’s data continue to disappoint, there is a persistent theme in much of the outside commentary on its economic woes: that China is for some reason failing to take the “obvious” step of sending stimulus checks to households. The implicit argument is that the US handed out massive subsidies directly to households, got a great post-pandemic recovery and everything turned out fine. China did not deliver subsidies to households, and that’s why everything is very much not fine.

Why is China, still, not taking this course in spite of the positive example of the US? Of course, an obvious answer is that the people in charge don’t think the US example was that positive, and anyway aren’t particularly prone to think of the US as a model to emulate. The merits of the pandemic fiscal-policy response are still pretty contested in the US. Plenty of people think of the stimulus as a fiscally irresponsible gamble that ultimately had pretty disruptive macroeconomic effects, because of the huge interest-rate increases that were required to bring inflation under control; my perception is that many people in China share these views. Still, the case for stimulus is probably getting stronger rather than weaker at the moment as China falls further away from potential growth and full employment.

My suspicion is that part of Chinese policymakers’ reluctance to use direct transfers to households as a short-term stimulus stems from a fear of setting a fiscally destabilizing precedent. If debt-financed transfers failed to generate a sustainable recovery, the money would be wasted. But if transfers succeeded in generating a good burst of growth, that could have even bigger longer-term effects. It would mean that, the next time China falls short of potential growth and full employment, the political pressure to roll out household transfers again would be overwhelming. What started as a one-off policy response could become entrenched as the expected response to any growth slowdown, and would add to government deficits and debt over many years rather than just one.

Why should this hypothetical possibility be a serious concern for Chinese policymakers? Because it is exactly what happened after the 2008 financial crisis. An unprecedented global shock led to an unprecedented policy response, as the central government encouraged local authorities to use off-balance-sheet borrowing to fund a wave of public works projects. If that had been a one-off measure, it would have been a powerful example of effective and unorthodox policymaking. Instead, the infrastructure stimulus institutionalized fiscal irresponsibility on a massive scale: a decade and a half on, the off-balance-sheet local borrowing is even bigger relative to the economy than it was in 2008, according to IMF estimates. It would be hard to find a better example of Milton Friedman’s quip that “nothing is so permanent as a temporary government program.”

China’s political system therefore does not have a good track record of being able to take away the punch bowl in good economic times in order to be able to share out more punch in the bad times. The dubious legacy of the 2008 stimulus means that China now needs fiscal consolidation to get long-term debt dynamics under control–at exactly the moment that it once again faces a shortage of aggregate demand.

Striking the right balance between the structural and cyclical issues is indeed quite difficult. Maybe the right answer is in fact that the cycle needs more attention at the moment, because a failure to address the loss of growth momentum would allow hysteresis to set in and create even more long-term costs for the economy. But it is perhaps understandable that the people inside China’s system are reluctant to experiment with new forms of fiscal stimulus before they have gotten the old ones under control.

What accounts for the extraordinary rise of China’s private sector after the economic reforms that followed Mao’s death? The 1980s were a pivotal decade for China in many ways, as the rapid growth of the private sector transformed the structure of a still officially socialist economy. In 1987, Deng Xiaoping famously said that the explosion of private-sector activity in the countryside in particular came as a surprise to him:

In the rural reform our greatest success — and it is one we had by no means anticipated — has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously. …If the Central Committee made any contribution in this respect, it was only by laying down the correct policy of invigorating the domestic economy. The fact that this policy has had such a favourable result shows that we made a good decision. But this result was not anything that I or any of the other comrades had foreseen; it just came out of the blue.

Of course, the township and village enterprises–which is to say, private companies avant la lettre–did not actually come out of nowhere. They drew on China’s long traditions of commercial enterprise, and people’s experience with living and operating in a market economy before it was suppressed in the 1950s. In an interesting new paper, “Markets under Mao: Measuring Underground Activity in the Early PRC” (the link is currently open-access), Adam Frost and Zeren Li offer quantitative evidence to suggest that hidden market activities continued at scale even through the height of the Maoist period:

There was already substantial market-based activity prior to the launch of economic reforms. Even after the “socialist transformation” of the Chinese economy was ostensibly complete, Chinese citizens continued participating in “underground market activity,” i.e. private acts of exchange that occurred outside of systems of planned allocation and distribution and which were intentionally concealed from the state. A broad host of actors, ranging from rural people who “abandoned farming to take up commerce” to merchants who specialized in the illicit wholesale trade of ration certificates, devised novel strategies to evade state control and engaged in consensual private transactions. While these individuals often filled critical voids in the economy, they were collectively maligned as “speculators and profiteers” and, for three decades, were the recurring targets of mass campaigns. Yet, even at the height of the Cultural Revolution when anti-capitalist sentiments reached their zenith, “speculation and profiteering” were never wholly suppressed.

The authors use local administrative documents recovered from flea markets to compile data on 2,690 cases of “speculation and profiteering” that authorities prosecuted in two areas, the rural county of Chun’an in Zhejiang and the city of Zhenjiang in Jiangsu. These records often list what items the “speculators” were accused of selling, and at a what price. The value of the transactions was usually pretty substantial:

The mean case value (i.e. the estimated total value of activity described in each case) is about 334 yuan for Chun’an and 362 yuan for Zhenjiang. To put these figures into perspective, in 1955 the national average income was 102 yuan for an urban worker and 94 yuan for a rural farmer, and income levels remained stagnant for most of the 1960s and 1970s. In other words, the mean case involved activity that represented three years’ worth of consumption for the mean worker. Given that prosecuted individuals probably succeeded in concealing some portion of their gains, this figure is likely only a fraction of the true quantities of goods, cash, and ration certificates involved in each case.

The authors use various assumptions to estimate the total size of underground market activity from these figures. The results depend so much on assumptions that the exact figures are not particularly meaningful, but the range of estimates is consistent with contemporary estimates of the “shadow economy” of illegal transactions in most countries–perhaps suggesting that Maoist China was more economically normal than its ideology would indicate. This finding is also interesting:

We observe that the average spread between the purchase and resale price of items in underground market transactions was relatively low and remained so throughout the entire period of observation. There was, on average, no more than a 19% mark-up on items that were bought and resold in underground markets. These figures suggest that the maximum perceived risk of capture was low, even during the height of the Cultural Revolution.

The low black-market premium also suggests these kind of underground transactions were widespread enough that the scarcity value was not extreme, and that underground traders faced enough competition that they could not charge exorbitant prices. The repeated campaigns against “speculation and profiteering” that generated these administrative documents therefore do not seem to have been particularly successful. When the formal prohibitions on these private transactions were lifted in the post-1978 reforms, many Chinese people had plenty of experience with trading and business that could be quickly put to use.

Frost and Li’s account lines up with my own thinking about the reasons for the early success of China’s economic reforms–although when I pondered this question before, I focused more on the fact that China did not actually spend that much a time as a full-fledged socialist economy (see my previous post, “How long was China Communist?“). The time from the forced nationalization of private firms in the mid-1950s to the re-legalization of urban and rural private sectors in the early 1980s was barely three decades. By contrast, socialist prohibitions on private enterprise in the Soviet Union lasted two full generations, long enough to wipe out any previously existing base of skills and knowledge formed in the private commercial economy (which was not that developed in tsarist Russia anyway).

These two explanations seem fully complementary to me: China’s socialist prohibitions on private transactions were neither complete enough to truly stamp out market-based activities, nor did they last long enough to for the population of people with experience running businesses in a market economy to die off. Once the state began to tolerate markets again, the hidden traditions of private enterprise could come out into the open.

I got involved in a Twitter discussion with Brad Setser and others over the nature and causes of China’s high share of global manufacturing. This prompted me to go through some tedious statistical work to establish some basic facts for my own satisfaction. The results are now more or less final, so I am going to outline them here.

We know that China has a high share of manufacturing in its GDP, with the sector’s value-added accounting for about 28% of total value-added at last count. This is higher even than other manufacturing champions like South Korea (25%), Germany (21%) and Japan (20%), let alone the relatively de-industrialized economies like the US (11%), UK (10%), Brazil (12%) and South Africa (13%). Since China is such a large economy, accounting for about 19% of global GDP, its manufacturing sector is also very large relative to the world economy. As of 2021, China accounts for 31% of the world total of manufacturing value-added, according to the UN national accounts database.

Why is China’s manufacturing sector so large? In part, China is making goods for its own use, so its large manufacturing sector reflects the growth in China’s own demand. In part, China is making goods for use by others, so its large manufacturing sector also reflects its success as an exporter. We can start answering the question by quantifying the relative contribution of those two factors.

I did this by using the OECD Trade in Value Added (TiVA) database. Among other things, the database breaks down China’s manufacturing exports by whether the value-added originates domestically or abroad (in the form of imported goods and services used to produce exports). Although there is some change over time, about 80% of the value of manufacturing exports ends up contributing to domestic value-added. Once we know the amount of domestic manufacturing value-added generated by external demand, we know that the rest must be generated by domestic demand.

Doing this simple calculation shows that in recent years, about 40-45% of China’s manufacturing output has come from exports, while 55-60% has come from domestic demand. This pattern was established in 2009 by China’s massive property-and-infrastructure stimulus in response to the 2008 global financial crisis. Since then, the level of investment activity in the economy has stayed very elevated. So we can say that China’s manufacturing sector is indeed mainly oriented to domestic demand, but it’s definitely true that the contribution from exports is quite large. A 55-45 split in an economy of China’s size is a pretty significant reliance on external demand. And that reliance has increased more recently. The current edition of the OECD TiVA database ends in 2018; extending the estimates to 2022 shows that the export contribution has probably picked up quite a bit due to the pandemic export boom.

Nonetheless, China’s manufacturing share of GDP has declined since around 2010, meaning that manufacturing value-added has grown more slowly than the rest of the economy. The value-added breakdown shows that most of that slowdown has come from domestic demand, probably investment. What’s surprising is not so much that China’s investment boom has cooled off from the stimulus-driven peaks after the financial crisis, but that the slowdown has been so gradual. From about 2015-19, a slowdown in exports also contributed to the declining manufacturing share, but the pandemic export boom boosted the external demand contribution again. In a counterfactual world without the pandemic export boom, China’s manufacturing share of GDP would most likely be noticeably lower today.

The breakdown between exports and domestic demand can also be used to shed light on China’s share of global manufacturing (using world manufacturing value-added as the denominator rather than China’s own GDP). This shows a steadily rising trend, meaning that while China’s manufacturing growth did slow down relative to the rest of China’s economy, it continued to be faster than manufacturing growth in the rest of the world. But the drivers of the increase shift over time in ways that reveal the changing patterns of growth.

From 2000-2008, China’s share of global manufacturing rose mostly, though not entirely, because of growth in exports: this was the export boom caused by the mass relocation of manufacturing capacity to China after its WTO entry. Export value-added rose to 8.4% from 2.7% of the global total, while domestic value-added rose to 6.1% from 4.3%. From 2008-2019, export value-added rose further to 11.5%, while domestic value-added rose much more, to 16%. Again, this is the post-financial crisis investment boom. Over 2020-21, export value-added rose to 13.9% while domestic value-added rose to 17.4% (the UN database that supplies the global total of manufacturing value-added hasn’t yet updated to 2022).

Whether China can sustain its pandemic-era gains in exports is obviously an important global macro question. Some of that boost was due to surges in demand in the US and elsewhere that are now retreating. But some of it was due to supply-side developments, like China’s emergence as a major vehicle exporter, that could be more durable. Success on the export front would certainly help support China’s share of global manufacturing and its manufacturing share of GDP. But the crucial factor is really whether China can sustain the super-elevated levels of investment that have driven domestic demand for manufactured goods. Given the unwinding of the property boom and the complete buildout of many forms of infrastructure, this seems increasingly unlikely. Broadly, the fading of the post-crisis investment boom is why I think China’s manufacturing share is probably going to decline again (see my earlier post, “Re-de-industrialization“).

Technical note. Making these calculations using the OECD TiVA database was pretty straightforward. Extending them into more recent years using China official data was a bit tricky. The total for China manufacturing value-added in the TiVA database was basically the same as in the NBS national accounts. However, the value of manufacturing exports is not the same; the TiVA database is built on top of international input-output tables that try to make different countries’ trade figures consistent. Usually, the value of China’s manufacturing exports in TiVA is around 80% of the value of manufacturing exports reported by China Customs. I’m not sure what the reason for this is, but it seems to suggest the headline value of manufacturing exports is overstated. Using the Customs value of manufacturing exports generated a residual for domestic manufacturing demand that was implausibly small, so I adjusted it to be consistent with the TiVA data by using the ratio between the Customs figure and the TiVA figure.

Shortly after being reappointed as the governor of China’s central bank, Yi Gang gave a speech in Beijing with the rather dull title of “Building a Modern Central Banking System to Contribute to Chinese Modernization.” As is obligatory with the speeches of most Chinese officials, it opens and concludes with references to the important decisions of the Communist Party and the major slogans of the moment.

The key term in the title of the speech is one of these coinages from Xi Jinping: the more precise translation would be Chinese-style modernization (中国式现代化), as it refers not simply to the modernization of China but modernization done China’s way. It’s one of the umbrella terms for his overarching project of achieving national greatness.

The bulk of the speech consists of Yi summarizing the central bank’s major policy priorities and justifying how it has pursued them. The temptation for foreign readers is to skip over the political sloganeering at the beginning and end and focus on the technical content in the middle.

Indeed, this was the approach that Yi himself took when he gave a more elaborate version of the same presentation, in English and with charts and references to the economics literature, to an audience in the US. Yi favorably compared the gradualist methods of the People’s Bank of China, which moves interest rates rarely and in small intervals, to the dramatic recent swings in Federal Reserve policy (see the writeup in The Economist for more on this angle).

But abstracting Yi’s speech from the Chinese political context in this way risks blinding us to the some of the significance of what he says. How Yi positions the central bank’s technical policy priorities relative to the overarching goals of the Communist Party leadership is a very important part of his speech. What I think he is doing is nothing less than trying to ensure that modern central banking and financial regulation can be implemented in the Chinese political context.

To maintain political buy-in from the leadership for his preferred policies, Yi needs to convince them that these policies do in fact serve the overarching political goals set by Xi. He starts off his speech by citing the official mandates of the People’s Bank of China, as written in Chinese law. Based on the text of the law, he asserts that

Preserving currency stability and financial stability are the two central tasks of the PBOC. On this point, everyone has increasingly reached a consensus in recent years. By properly accomplishing these two tasks, we can promote full employment and economic growth, which better serves Chinese-style modernization.

That is pretty direct and clear: the traditional goals of the PBOC and the consensus of technical experts are not in conflict with the current political agenda, but actually support it. Yi further elaborates that the concept of currency stability includes stability of consumer prices and stability of the exchange rate, both of which are not only beneficial to the population at large but help the nation achieve long-term goals:

Stable consumer prices and exchange rates serve to safeguard the pocketbooks of consumers, so that the money in their hands won’t depreciate. Fundamentally, this is a people-centered effort to safeguard the interests of the broadest possible majority of the people. …

Price stability and the basic stability of the renminbi exchange rate at an adaptive and equilibrium level provide strong support for us to realize the strategic goal of Chinese-style modernization. 

At the end of the speech, Yi acknowledges that the new agenda laid out by Xi at the Party Congress and other high-level meetings requires at the Party Congress “means new requirements” for the work of central bankers. But fundamentally what he is saying in this speech is that these new requirements can be met by the same old policies. The key ones he highlights in the speech are: a less controlled and more market-determined exchange rate, strict regulation oriented towards preventing financial risk, and a conservative monetary policy biased against dramatic moves.

This emphasis on stability and continuity is probably why Yi’s speech got little attention in the press. He did not propose anything new, and largely emphasized recent accomplishments. But that is the point he wants to make: these policies have been successful in making China stronger, so they should continue. You don’t have to agree that his argument is correct on the merits to understand that he wishes to preserve the PBOC’s autonomy and policy preferences in an era of heightened politicization and grand campaigns.

It’s not hard to imagine how some of Xi Jinping’s priorities could potentially have big implication for macroeconomic policies. He has a vision of a whole-of-society effort to refashion China’s industrial base to make it less vulnerable to external shocks. His “dual circulation” concept calls for reducing China’s economic dependence on the rest of the world while increasing the rest of the world’s economic dependence on China.

To pursue these ideals, some officials could perhaps argue for an aggressively undervalued exchange rate, that keeps exports competitive and deters domestic spending on imports, or a much looser monetary policy, to ensure industrial upgrading has plenty of resources. That stuff hasn’t happened, perhaps because Xi favors strict supervision and control in finance as in other areas. But it’s still an open question how existing macroeconomic policies will adapt to the political requirements of Xi’s so-called “new era.”