This Special Issue focuses on the important question about China’s public finance, as well as the implications for credit creation, international investment, urbanization, and debt sustainability. The four articles utilize leading-edge theories and extensive empirical data to explore how local government finance could be made sustainable and contribute to “new urbanization” and how government finance, international investment, and RMB internationalization are interrelated.
Yan Liang’s piece, titled “RMB Internationalization and Financing Belt-Road Initiative: An MMT Perspective,” argues that financing Belt-Road Initiative (BRI) exposes an uneasy dilemma for China. On the one hand, using US dollar reserves to finance BRI’s trillion dollar worth of infrastructure investment poses significant financial risks and costs; and it would be much more desirable to finance BRI using the RMB. But on the other hand, despite various exchange rate and capital account policy reforms since 2005, the RMB internationalization process has been slow and uncertain. Further, the conditions under which US dollar financing may continue are precisely the barriers to promote RMB internationalizations. Using the Modern Money Theory, Liang reveals the constraints of using nonsovereign currency for international investment and explores the intricate connections between currency internationalization, financial stability, and development finance.
Using the same Modern Money perspective, Li Lili and coauthors investigate the evolution of the role of fiscal policy in China’s money creation and analyze the macroeconomic impacts of the fiscal creation of money. In their piece titled “Government Finance and Money Creation in China: An MMT Perspective,” they find that over the past 70 years, China has experienced a planned economy regime, a fiscal dominance regime, and a monetary dominance regime. And during this time the dominant mode of money creation has gradually shifted from fiscal creation to banking/credit creation. But Li and colleagues argue that the fiscal creation of money is still of great importance. Compared with credit creation, it helps to promote the development of real economy, reduce systemic financial risks, and narrow the wealth gap. They call for more reliance on fiscal expansion for money creation to better achieve the three goals of stable growth, risk prevention, and structural adjustment.
Ting Zhang and associates probe into the important question about debt sustainability at the local government level. In their article, “Research on a Measurement of the Safe Scale of Bonds in Central China,” Zhang and colleagues argue that the credit risk of the local government bond is mainly due to the mismatch between the issuing scale and the source of debt repayment funds. Zhang et al. select six provinces in central China as a research sample and use the time series model to predict the local government guaranteed fiscal revenue in each province from 2019 to 2021. An improved KMV model is then applied to measure the safe scale of issuing new bonds. The results show that there are credit risk problems in Hunan, Hubei, and Henan provinces with a default probability of 0.4%, and the actual issuing scale has exceeded the safe limits; the remaining three other provinces still have space to issue new bonds.
Finally, in the article “Does Local Government Debt Promote China’s New Urbanization?” Shujuan Li and Peishen Cao critically assess the role of local government debt in the “National New Urbanization Plan,” launched in 2014 to channel 100 million rural migrants to cities and towns until 2020. Based on their empirical tests, they find that local government debt promotes the process of urbanization in China as a whole, especially the construction of urban infrastructure, public service system, and industrial structure upgrading. However, local government debt is not conducive to improving urban household income and urban population density. They reason that this is because some of the local government debt is driven by special interests and involves land acquisition. They further show that the effects of local government debt on new urbanization vary from region to region. Li and Cao end their article with a call for the participation of foreign and private capital in promoting urbanization.