Opinion: How China Can Take Advantage of Its Fiscal Room to Maneuver (AI Translation)

【周刊提前读】美国金融学会前主席：中国如何释放财政政策空间？

The global economy, including China, is navigating a complex path to recovery, prompting questions about effective monetary and fiscal policies to stimulate growth. A new book, "The Nature of Money: Prosperity, Crisis, and New Theory of Capital" by Patrick Bolton and Huang Haizhou, addresses these issues by presenting a new theory of money likened to national equity, where optimal currency supply is viewed through the lens of corporate finance principles.[para. 1][para. 2]

The book was completed in Fall 2023, building on ideas from a 2018 paper by the authors that won the Sun Yefang Economic Science Award. The book's core theory suggests that money should be supplied based on potential national investment opportunities with positive returns, and that during financial crises, the central bank should issue additional currency to stabilize the economy and maintain national security.[para. 2][para. 3]

Yu Yongding from the Chinese Academy of Social Sciences praised the book for its innovative framework and perspectives on monetary policies and economic prosperity.[para. 3] In an interview, Bolton highlighted China's untapped productivity and significant debt overhang, suggesting that restructuring bad loans through central bank intervention could free up fiscal space and alleviate economic constraints.[para. 4][para. 5]

Born in Ireland, Bolton has an impressive academic background with degrees from Sciences Po, the University of Cambridge, and the London School of Economics. He has held prominent teaching positions at various institutions including the University of California, Berkeley, Harvard University, and Columbia Business School before joining Imperial College London in 2018. His research in corporate financial governance led to his collaboration with Huang Haizhou on this new monetary theory.[para. 5][para. 6]

Bolton and Huang Haizhou's theory likens fiat money to a country's stock, challenging the monetarist view that printing money invariably leads to inflation. They argue that increased money supply does not necessarily cause inflation if it funds investments generating positive returns, as seen in countries like China, Japan, and Switzerland.[para. 6][para. 7] China's experience, with significant infrastructure investments funded by increased money supply without causing prolonged high inflation, supports their theory.[para. 8][para. 9]

They further explain that money supply increases, if coupled with simultaneous output growth, do not necessarily lead to inflation. They recommend printing money to fund investments under certain economic conditions, such as during slumps when economies operate below full capacity.[para. 10][para. 11]

"The Nature of Money" also explores the coordination of fiscal and monetary policies, critiquing both Keynesian fiscal-dominated cycles and monetarist cycles. They argue that modern monetary theory (MMT) has limitations, emphasizing the need for investments with positive net present value to avoid inflation.[para. 12][para. 13][para. 14] Bolton underscores the importance of "debt governance" and prudent fiscal discipline, particularly for China, which needs to balance fiscal dominance with effective monetary policy to address its debt issues and unleash its growth potential.[para. 15][para. 16][para. 17]

Moreover, Bolton and Haizhou's work offers a new framework for central banks as "lenders of last resort," suggesting that during crises, central banks should prioritize equity over collateral to rescue banks and ensure financial stability.[para. 18][para. 19][para. 20] They propose a debt-to-equity swap approach to manage debt efficiently and stabilize the banking system, even if it means expanding the central bank's balance sheet, contingent on its solvency and credibility.[para. 20][para. 21][para. 22]

Bolton concludes that central banks should proactively manage debt and support commercial banks by restructuring bad debts, using their capacity to issue currency to maintain economic stability and growth.[para. 22][para. 23] His insights suggest that China could benefit from similar strategies to tackle its ongoing economic challenges.[para. 23]