Bulletins and News Discussion from March 10th to March 16th, 2025 - The New World Struggles To Be Born; Now Is The Time Of Proxy Wars - COTW: Myanmar

Good question. I was thinking whether I should explain it in MMT terms but from your other replies, you seem to already have some familiarity with it so it’ll be quite easy for you to understand.

You are absolutely right in that from an MMT perspective, the Chinese government can simply create the money it wants to fund social spending etc.

However, such mechanism does not exist when it comes to RMB issuance within China’s central bank (PBOC). Since the 1994 “exchange rate reform” that unified the dual exchange rate regimes and the depreciation of the yuan from 5.8 / USD to 8.7 / USD, and especially since joining the WTO in 2001, the expansion of the yuan monetary base has come primarily from accumulation of foreign reserves (at one point, it reached 90% of all new currency issued). After 2014, as the US ended its quantitative easing, export revenues dropped sharply and China has since maintained ~$3.2T USD of foreign reserves to this day. The proportion of foreign currencies in monetary base has since dropped from 90% down to 40-50%, and the rest is replaced by the central bank issuing various forms of financial instruments that collateralize assets e.g. repo, SLF/MLF, etc. to finance the creation of new monetary base.

From 2003-2013, the yuan monetary base increased by ~21 trillion yuan (8.5x expansion), and nearly all of which came from foreign reserves. In other words, Chinese exporters earned dollars/foreign currencies, sold them to the PBOC, the latter then bought US treasuries or other form of securities and kept them as “foreign reserves”, and in turn issue an equivalent amount of yuan into the economy (e.g. depositing into the bank accounts of the exporters).

Of the 21 trillion newly issued yuan from 2003-2013, ~13 trillion (62%) went into real estate and other speculative domains. The other 8 trillion entered the real economy but because the RMB issuance mechanism was so heavily reliant on earning foreign currencies, a large part of those 8 trillion went into export-oriented sector as opposed to the domestic-oriented sector.

As such, financing of domestic-oriented economy became deprioritized. This drove local governments to borrow from commercial banks and private investors to build infrastructures and high speed rail (instead of directly financed by the central government). At the same time, because the high proportion of foreign reserves drove down the bank reserve interest rate (lower than deposit rate), this forced commercial banks to raise their lending rate and this ultimately led to a proliferation of shadow banks. Prior to 2014, local governments were not allowed to issue their own debt/bonds, and as such borrowed through these shadow banks with high interest rates, and this formed the mountain of “hidden debt” that has continued to strain the local government finances to this day.

As you can see, these are all very regressive methods of financing a government project from an MMT perspective.

Let’s say you are a local government and want to build a hospital or a high speed rail station, you have to borrow from the banks or issue bonds to attract funding from private investors. First, exporters earn foreign currencies and sell them to PBOC, which are then kept as foreign reserves (the PBOC then issues new RMB currencies into the banking reserve to increase the monetary base). Because commercial banks are required to keep a minimum reserve requirement ratio (RRR), the more reserves there are in the banking system, the more the banks can lend.

Second, because economic growth is reliant on export, the funds from bond holders would also likely come from earning foreign currencies first (or through secondary effects of export revenues being used to fund domestic development).

In either case, the financing has to first come from a foreign country willing to spend their money on Chinese goods (i.e. the US running a huge and persistent trade deficit).

On the other hand, let’s see how the RMB issuance mechanism would work under an MMT framework (China having full monetary sovereignty): PBOC directly creates new issuance of yuan into the reserve system of the commercial banks, and commercial banks then deposits bank accounts of the companies contracted to build hospitals/high speed rail stations. The excess reserve was then soaked up by the Chinese government issuing government bonds, purchased by the PBOC.

Note the very important difference here: the MMT financing mechanism involves the government directly buying from the local economy (new money injected directly into the economy), whereas the current financing mechanism that China employs often relies on selling stuff to foreigners first AND borrowing from commercial banks which increases the systemic risk of a banking crisis e.g. commercial lending creates assets for the borrowers (deposits in the local government account to build infrastructure) but also liability for the creditor (local government has to repay that debt in the future) - no new money is directly injected into the economy. If export revenue does not increase, then the broad money supply (e.g. M2 per IMF definition) expands but the monetary base stays the same.

With regards to the new Chinese government budget of increasing deficit to 4% - this is a good thing and will certainly increase spending on welfare etc. However, whether an increase from 3 -> 4% is enough to offset the slowing consumption, only time will tell. More importantly, this increase in deficit is may or may not be permanent (many countries increase their deficits during recessions and then pull back when the economy stabilizes). This is opposed to the MMT framework of calling for permanent deficit spending. In other words, the local governments would not have been mired in such a huge amount of debt (no need to borrow in the first place) had the financing mechanism was conducted this way. China would not have a problem with funding social welfare and other public services at all.

Finally, I will go through one more set of figures with you, as an example: following the 2009 GFC, the Chinese government immediately a 4 trillion yuan stimulus to keep the economy from going into recession.

Of the 4 trillion yuan, 1.18 trillion came from the central government, which was financed by issuing government bonds. The other 3.82 trillion came from local government and private sector financing. The local governments soon followed with their own initiatives that added another 18 trillion yuan into the stimulus, which was financed by borrowing from the banks or private investors.

All of the information above came from Jia Genliang’s 2018 book《国内大循环：经济发展新战略与政策选择》(The Great Domestic Circulation: New Strategy and Policy Choices for Economic Development), who is the foremost MMT/Marxist professor at the People’s University today.

As you can see, whenever the Chinese government increases its deficit spending, it has to be funded from somewhere else. This is a “hard currency” approach as opposed to the “soft currency” financing that MMT is advocating.

Hope this makes it clear. Let me know if you have any other questions.