Episode 159 – Examining China with an MMT Lens with Yan Liang

Macro N Cheese – Episode 159
Examining China with an MMT Lens with Yan Liang
February 12, 2022

 

[00:00:04.230] – Yan Liang [intro/music]

China is now producing 70 times more solar panels, and it is selling now 4 times more EVs than the United States. So I think these kinds of manufacturing capacity, technology capacity are very important for that sustainable growth, for sustainability.

[00:00:25.450] – Yan Liang [intro/music]

What prevents full employment? What prevents job creation in the United States and in China as well? And I don’t think that we should blame trade or exports. We should really blame the incapacity of the government to create sufficient jobs for the people – and good jobs.

[00:01:42.110] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.130] – Steve Grumbine

All right, it’s Steve with Macro N Cheese. Today I have got Yan Liang, and she is the Peter C. And Bonnie S. Kramer Chair, Professor of Economics, and Chair of International Studies at Willamette University. She is also a research scholar at the Global Institute for Sustainable Prosperity. Yan specializes in Modern Monetary Theory, international trade and finance, economic development, with a special regional focus on China.

Yan publishes in various leading heterodox journals, including Journal of Economic Issues, International Journal of Political Economy, Forum for Social Economics, and China-focused journals such as The Chinese Economy and A China and World Economy. I’m very excited about this because, as you know, last week I had Vincent Huang on, and we talked extensively about a lot of the things that the west gets wrong about China.

And we even touched on some very important structural things about culture. But today is going to be a little bit different. I want you to understand that China is not our enemy, and there’s a relationship that exists between the United States and China. But, in particular, I want you to understand the monetary operations and the economic model that China uses. And so I could think of no better person than Yan. And yet you are also related to another good friend of mine and MMT economist as well, Eric Tymoigne.

[00:03:17.290] – Liang

Yes. We’re husband and wife. We’re in the same household, and we were both at UMKC. We were both students of Randall Wray. Fadhel [Kaboub] who is a regular guest on your show.

[00:03:31.200] – Grumbine

He’s a board member.

[00:03:32.550] – Liang

He’s also good friends of ours from graduate school. So we have an MMT family.

[00:03:38.590] – Grumbine

That’s so awesome. I can’t even imagine how much MMT knowledge is there. That’s incredible. Listen, I got to read some of your stuff. I got to watch some of your interviews. I was very excited when I was able to land an interview with you, because right now there’s probably no greater economic subject anyway, aside from maybe inflation, than the role of China in the global economic story.

And as we came out of a pandemic where many of us in the United States look at our shelves and they’re empty at the grocery store and we see prices going up and people are desperate for answers, I figure it was important because all the mainstream stuff I listen to tells jaded economic tales. I think the average American and probably people around the world are getting force-fed a lot of economic mumbo jumbo that doesn’t amount to a lot of truth.

And so, what I’d like to do is start with an understanding of the Chinese economy. In my opinion, it appears that many people have no idea that MMT is even something that could be considered in China. Talk to me a little bit about the Chinese economy.

[00:04:52.150] – Liang

Sure. It’s my pleasure. It’s really an honor. I’ve been a long-time listener to the program to the extent that I always play this in my car. And my two boys, they start to shout, “I want the truth.” So thank you so much for having me here. So I really appreciate when you started by saying we’re not enemies. So, we’re definitely competitors. That’s true.

So now we know that US and China are competing in technology and in trade and investment, in many of these economic fronts. But again, competition can be constructive. It could, for example, allow United States to look at China and say, well, maybe we should also up our infrastructure spending to build the US’s Strength from within, which is a title from a very quite well known book called “Stronger.”

So I think competition is a good thing. But we’re not in any way fighting the, so called, cold war because there’s no ideological war, there’s no arms race. There’s a tech race, which is good. But at the same time, I also agree that the US-China economic relationships have created winners and losers. So there’s a book titled “Trade War is a Class War.”

So, I think in both countries we see the working class, in some ways, suffered from globalization. But I don’t think this is really the culprit just because the two countries are trading. I think a lot of institutional economic policies need to be put in place to redistribute the benefits of these kinds of global connections. Now return to the question that you asked about Chinese economy.

I don’t know how much Vincent has covered in the previous episode, so I don’t want to maybe repeat a lot of things he might have already said. But it is true that there’s a lot of misconceptions about the Chinese economy. A lot of times people say China succeeded because of market reform. Let the private sector, let the market take the driver’s seat. That’s why they grow.

And there’s the other arguments say, well, it’s because the opening. So, China has integrated itself in the world economy and exports like no tomorrow. And that’s why China grows. There’s some truth, maybe, in some of these arguments. I think the negligence of the state, the role of the government in providing development financing, in formulating industrial policies, in building all these infrastructure, both hard infrastructure and soft infrastructure.

I think without all these, I think we’re really getting China wrong. And that’s one of the reason, I think, behind the current debate about China’s economic growth is going to be stalled because the government is now encroaching on the private enterprises, private markets. The idea of “guo jin min tui” (国进民退), the rise of the state and the decline of the private, I think that kind of perception is very misleading.

It is true that China’s growth started to moderate it right around, I would say, after the global financial crisis, but mostly in the recent years, 2015/16. But that has a lot to do with, I think, structural reasons like population, demographic factors, but it also has to do with, I think, policymakers that are having this long game, thinking about how we can grow China in a more sustainable way, unlike in the past, where extensive growth has been a major driving force.

[00:08:19.090] – Grumbine

So much of what people hear about, read about, is the punitive nature. And part of that is, I’m sure, the “red scare.” We hear all the time, socialism, communism, and people don’t take the time to think past that. They’ve gotten stuck on a talking point that they’ve spent billions over years to indoctrinate us to feel a certain way.

But what I’m hoping is that as we move forward, a Green New Deal, which is one of the US focuses – it’s a global thing. Fadhel, who you brought up, is focused very heavily on a global Green New Deal and reparations in the global South. But China has been given the role of being the world’s manufacturing center. How does China grow in the ways that will keep it solvent and good for its citizens and grow in a green way while taking into account the real climate issues that are facing all of us?

[00:09:25.450] – Liang

Yeah, I think that is an excellent question. So, we all know that China is a major industrial powerhouse. And so, yes, in the past four decades, China has grown by exporting. So, you’re right that 30 or more percent of China’s production are being exported. So, in some ways, when we think about China as the biggest emitter, we can’t forget the fact that a lot of production taking place in China simply is to replace production elsewhere.

Now, I think, again, industrial growth was important for China in the past few decades. And it’s not just, again, market. The government has fostered all these infrastructure, industrial parks, the roads, the railways, the ports, and all of this facilitated China’s industrial take-off. But it is becoming increasingly unsustainable. Two-thirds of China’s energy consumption goes into industrial production.

And that is clearly unsustainable. Why should China continue to produce and pollute and exhaust the natural resources and simply ship these products abroad? Plus, I think China is not a very efficient producer in some ways. The energy intensity is quite high in this industrial production. So I think it is to the benefit of China and to the world to change that.

We need to rely less on the kind of extensive growth model that we simply put in capital, put in labor resources in order to grow the economy. And I think that is actually changing in China. So, for one, we know that China’s working population, the labor force, has peaked to about 800 million in the middle of 2010s. And so now we are not having as much this young labor force.

It’s projected the labor force is going to continue to decline by 25% by the turn of the century. So in other words, China cannot simply rely on cheap labor source to propel its industrial growth. And then on top of what we just talked about, the energy consumption. What China has been trying to do since Xi Jinping came to power was to really try to upgrade its industrial production.

So this idea that we need to have intellectual or the so called smart production, instead of relying on a lot of resources, we need to focus on high tech manufacturing. And I do think this is important because there is some truth here that we need to maintain some manufacturing capacity and capability in order to innovate, in order to deal with climate change and the green transformation of the economy.

Just a quick example, China is now producing 70 times more solar panels, and it is selling now four times more EVs than the United States. So I think these kinds of manufacturing capacity, technological capacity are very important for sustainable growth – or sustainability, right? [laughs] Not about growth, but just the sustainability. Yes.

[00:12:29.050] – Grumbine

Warren Mosler frequently talks about an export is a net cost and an import is a net benefit. And all the various trade deals that we’ve seen across the globe, how it ends up directly destroying labor in the country that is exporting their manufacturing base because the government doesn’t supplant that with a job guarantee. So it ends up leaving a bad taste in a lot of people’s mouths.

But China is giving away its real and its service based resources in exchange for other people’s digits and pieces of paper. China has a lot of real resources, human labor and capital to be able to take advantage of that. But at some point, their real resources are going to be given out to the rest of the world to their detriment. Can you talk to me about that import/export relationship and why China’s focus is on manufacturing and how that might change the relationship between the US and China going forward?

[00:13:36.790] – Liang

Yes, I think this is a very complex question, I would say. Yes, in some ways, I think export has helped China to grow. One important reason for that is because when China started out, its domestic consumption is very low because of low growth, low income. And investment cannot simply grow without that final consumption to validate that investment growth because we know investment boosts not only demand side but also supply side.

So at some point you have to have the final consumption to validate that investment output growth. So in a way, export was a very important source of China’s demand. But as China grows, as China is able to develop its internal market, I think that role played by export has been continuously reduced. If you look at China’s, for example, net export or GDP growth.

Right now, it’s hovered around 1%. So export is not really an important demand source any longer. China needs to grow its domestic market. And then the second point is – you’re absolutely right. I had a lot of conversations with Warren and I think he does get it right. The export is actually a cost for a country.

And the mainstream argument has always been China is on this neo-mercantilism path; that it wants to export so that it can accumulate reserves and that reserves can keep the Chinese currency value low. And that would then perpetuate that export-led growth. I think what they again did not understand was – China really learned the lesson from the Asian financial crisis and started to build reserves since then.

The idea is not really trying to keep the currency value very low in order to support export-led growth, but it’s really trying to set up that war chest to make sure that capital inflow/outflows are not going to destabilize China’s financial system. And they have very carefully monitored the capital control. So I think that is one of the reasons, as a side note, why China is able to implement a lot of this fiscal spending because, even though it has in some sort of fixed or managed exchange rate up until 2005, it does have a very tight grip on the capital control.

[00:15:53.880] – Grumbine

Before you go past that, I just want to ask the question. Capital controls come up frequently. However, they talk about it as if we all know what that means. Could you explain that in terms of China, for the audience?

[00:16:08.470] – Liang

So the Chinese approach was to differentiate these kinds of long-term oriented, modern grade type of the so-called foreign direct investment. So, it distinguishes the foreign driven investment from the so called portfolio investment. It’s basically investors coming in and purchase stocks and bonds and other financial instruments.

So China welcomes the foreign investment and they also evaluate very carefully, making sure when this capital comes in, they will stay for a certain duration of the time and they’re going to actually invest, either in green field or brown field, right? Some merger and acquisition. But the idea is this capital is not going to come in and try to speculate on the bonds market, on stock market or any other financial markets.

The portfolio investment is being capped. It’s been very carefully monitored. So, that is the Chinese approach. So, they do not want the capital to flow in and out of China for obviously, I think, good reasons. The mainstream economists always actually talk about this trilemma – that you cannot have fixed exchange rate and free capital mobility and autonomous monetary policy.

And what MMTers would add as well, there’s actually “quadru-lemma” – you can’t have none of those three things at the same time, nor can you have the fourth element, which is fiscal policy, fiscal autonomy. So, I think China is very careful to preserve that policy space by, on the one hand, managing its frenzy up until 2005, and then it relaxed a lot more on that, but has been keeping a really firm grip on the capital control.

[00:17:48.310] – Grumbine

When China purchases debt in the US, they look at the bond purchases and their bond holdings. And companies do business with the United States. They receive US dollars. They can choose to hold those dollars or they can put them in the bonds, some sort of a debt instrument, or they can trade them in for a different currency that they want to save in. Can you talk a little bit about China’s dollar position in terms of how they view the United States in their trade and how they keep their money in US debt? What the angle is there?

[00:18:23.950] – Liang

Absolutely. So, yes, China has accumulated quite a bit of foreign exchange reserves. At the peak, it was about $4 trillion. But reserves are not really a benefit. It’s actually a cost. The reason is because when you think about – we mentioned earlier the exports, China exports a lot – and those are the real resources. In return of the exports of real resources, China received the foreign exchanges.

And what did they do? They use foreign exchanges to purchase a lot of treasury bonds, which pays very low interest, as you know. So, in a way, I think this does not make any economic sense. But like I said, this is a cost that China is willing to pay to stabilize its financial system. But progressively, I think the Chinese government has realized the problem here.

So, they have been investing out of that foreign exchange reserve. For example, in the Belt and Road Initiative that was launched in 2013, where China is investing abroad, building infrastructures connectivity. And so that is definitely a good use, I think, from the foreign exchanges. It earns much higher return. And it also produces a lot of, I think, real substantive benefits for many of these developing countries.

They’re able to get their infrastructure upgrades, they’re able to amend the infrastructure deficit gap. And in many ways also, I think it helps to, again, green the economy, not just within China. China did finance a lot of coal mining and coal power generation in the past but, very recently, China has promised to stop doing so. I think, yes, there is foreign exchange reserves accumulation in China, but I think over time, China has learned to use that foreign exchange in a much smarter way.

That said, I did publish a paper talking about how the Belt and Road Initiatives may not be sustainable if China keeps spending dollars when it’s not its own selling currency. But in any case, I do think, yes, there is exchange regulation, but now I think China is using it in a better way. And going back quickly on that export story, I think I want to just add one last thing, which is I think, like I said, many people believe that export is a net cost to the economy because it costs jobs.

Well be that as it may, I think there are many ways the government can create jobs, and so I don’t think this is really a good strategy from the left or from the progressives to just say, well, we need to stop trading with these countries because they’re taking our jobs away. I think the real question is how we can create more jobs instead of pitting the working class of one country against the other country.

What we really need to be thinking about is what prevents full employment, what prevents the job creation in the United States and in China as well. And I don’t think that we should blame trade or exports. We should really blame the incapacity of the governments to create sufficient jobs for the people, and good jobs.

[00:21:29.770] – Grumbine

I love that. The neoliberal establishment talks a good game about jobs, but in reality they keep pushing out their power to the private sector as opposed to wielding the power that China doesn’t shy away from in terms of molding, like you said, with capital controls. It seems like in the United States we get a lot of lip service about building good jobs, but in reality we just see a massive vacuum sucking GDP up to the top.

It seems like in China it’s a little bit more egalitarian. The wealth gap is not as severe, and there is more universal opportunity at some level for leading a life without the precarity. Everything seems to be taken care of with a mindset of empowering and improving the lives of Chinese citizens. Why doesn’t China export that? Can you talk a little bit about the priorities of China in that space?

[00:22:34.810] – Liang

Yeah, I agree. In some ways, I think China has that egalitarian socialist legacy. When you look at, for example, gender equality and so on. Nonetheless, I do think that China also has its own inequality problems. When you look at the numbers of billionaires that China is accounting for, I think I can’t remember exactly, but I would say at least more than one third.

So you do see this kind of widening inequality in China, especially between rural and urban, between the east and the west. That’s what many people said – there are many Chinas within China. So I think China has its own problems that it does need to, in a way, fix or at least improve. But you’re right, there are some, I think, kinds of, for example, public pensions and public health care that does help to provide a certain floor to the economy and to people’s livelihood and well-being.

But at the same time though, as you probably know, one of the signature, I would say, policies of Xi Jinping’s administration is so-called common prosperity and under that, there are many different things that are happening. There is a crackdown in the tech sector and they are trying to solve the so-called 3 mountains on people’s back education, housing, and also healthcare.

So this idea of common prosperity, I think is really trying to elevate even more that egalitarianism that I think gradually eroded in China because of the sort of market reform and opening up. So, I think it’s a welcome, I would say, approach to orient China to promote even more equality. But at the same time though, I think it’s clear that this is not just out of the goodwill of the policymakers because of socialism’s lofty goals of benefiting everyone.

I think there is a political reason that Xi Jinping needs to consolidate that political rule, that legitimacy of the party to spread wealth more evenly. At the same time, I think it also makes great economic sense because if you do want to promote domestic consumption growth, you can’t have that widening inequality because wide inequality, as we all know, is going to reduce the consumer demand, consumption.

So I think it is the right direction for China to pivot towards, but exactly how this is done, I think that is really open for debate. So China is still very hesitant to have any sort of tax reform that could be much more progressive to redistribute wealth. But instead what China has been doing is promote philanthropy and trying to make markets more competitive and less monopolized.

And China’s social spending at the government level is still quite low .9% of the GDP, which is much lower than the OECD countries in some developing countries. So I do think there’s room for China to improve to really equalize the economy a lot more.

[00:26:08.430] – Intermission

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[00:26:34.410] – Grumbine

With Taiwan and Hong Kong, there’s tensions in China, but we often see the global community crack down on China as a human rights abuser. And so there’s a lot of negative connotations about the human rights element. I understand a lot of that is Western propaganda but I also understand that the world unites around this. What is that all about? Can you give us the straight angle on that? Because I don’t want people carrying lies that we’ve been fed daily from the MSM as well.

[00:27:10.050] – Liang

Yeah, I think again this is not a very complex question. We all live in a very complex world.

[00:27:18.570] – Grumbine

Sure.

[00:27:19.600] – Liang

So, I think from the western’s perspective, the biggest human rights is the political right to freedom of speech or religious freedom. But I think in China, the leaders really have a very different set of their definition of human rights. For them is to provide livelihood to the people, to let people out of poverty to give them a way of sustaining themselves.

So, I think that is a very important disagreement or divergence in both this sort of ideological camp, for the lack of words. That said, though, I do think that the United States definitely have this, in some ways, vested interest, especially in the right wing circle, to demonize China, because that is one of the strategies to pit the whole world against China and win that economic and technological race.

So, I think for Hong Kong, let’s look at those issues maybe quickly, one by one, for Hong Kong. I think one of the problems here is that China promises one country, two systems, and a lot of protests that was happening in Hong Kong in the past two years were actually insistent on some kind of independence, some kind of separation, I would say, politically, from the mainland China.

And that is definitely challenging that one country premise. And I think that is one of the reasons that these kinds of tensions build up. Hong Kong has not been able to establish the so-called national security law since it returned to China in 1997. So that’s why the Beijing administration was going in and trying to establish that with them.

And by the way, the US National Endowment for Democracy spends a million dollars supporting these protests in China. Now in Taiwan, China has promised not to use force to take over Taiwan so long as Taiwan does not declare independence. Suppression from China in a diplomatic way. Taiwan is extremely autonomous in terms of its political system, its economic system, its cultural system.

But there has been integration in many commercial activities, economic activities, and human to human connections over the years. But I think there is this argument that China is now taking bolder and bolder actions towards Taiwan, but I think that to a large extent is China’s reacting to the United States and to Taiwan’s own actions. Now, the US has promised back in 1972 through Nixon’s trip and then through Jimmy Carter and then talking common agreements and whatnot.

But there was no official relationship between the two, and there should not be any diplomatic formal relationships. But look at what’s happening now. Just two weeks ago, the House is putting up this bill called the US Competition Act, in which I think it really emphasized or trying to increase official ties with Taiwan, that they are going to rename the road where the Taiwanese embassy is going to be at, and they keep sending troops and selling weapons, which the US promised not to do.

So, I think there is a tension here. There has been, I think quite stable equilibrium between the mainland and Taiwan. Taiwan is able to do whatever they want as long as they don’t declare as an independent country. But I think that kind of stable equilibrium now is increasingly at risk, which I think is a big risk. What we want to see the least is to have force, to have violence between US, China and Taiwan.

So, that I think is another issue. And then the last one about human rights in Xinjiang. I think that is a very complex issue. I know that definitely the whole so called concentration camp. I think it’s a distortion of the truth, of the facts, or at least overstatement or exaggeration. A lot of the so called evidence is really not founded.

I’m not a really sort of expert on this, but when you listen to some of the former ambassadors or some of the independent journalists, a lot of them are criticizing the so-called evidence is from this one right wing evangelical Christian extremist pseudo journalist, and providing also the so-called evidence of concentration camp and genocide.

And I think that is very much unfounded. But it is true, I think that in terms of Beijing, they do need to reconsider the way to fight terrorism. I think for a long, long time, Beijing’s approach is trying to assimilate the Uyghurs by providing them economic and cultural opportunities that assimilate with the Han culture.

But I think terrorism has in some ways frightened the administration, and so they kind of up their actions, which I think, in some ways, are counterproductive. That said, I think, now, the UN High Commissioner for human rights, Ms. Bachelet, she’s still trying to get access to China and have these sort of large scale investigations.

So I think without any further evidence, I think it’s very difficult to really understand what’s happening. And then, on the other hand, we also know that I think it’s right now quite little thing that this Lawrence Wilkerson, who is the former chief of staff of Colin Powell, stated on TV that one way to destabilize China is to use internal conflict between the Han and the workers in Xinjiang area.

So I think for China, yes, it has a lot of room to improve its political rights, its human rights, but unfortunately, I think it’s not up to the United States to interfere in China’s internal affairs. Not about we can go about this what aboutism. So what about Saudi Arabia that US is a close ally with? What about in the US? The black population is one third.

[00:33:06.750] – Grumbine

What about the US? Exactly?

[00:33:09.510] – Liang

Yeah. What about the US? 14% of the population is black, but one third of the prison population. So, yeah, I do think both countries should work on their own human rights issues, but not pointing finger at each other or demonize each other.

[00:33:25.590] – Grumbine

So much of the geopolitical theater is about demonization and who gains from this? The United States government is a nonprofit entity. It has no profit motive so it’s really about industry wanting a piece of China and US corporations pressuring the United States government. So, what is the point other than the government has largely been captured by lobbyists and major corporate interests and donors.

And we see this in every single political fight that we have for Medicare for all, college tuition, all the issues that we face come back to this. So, I guess, as we look in the mirror at our own problems and we think about how we could become a better global citizen, is that really the question anyway? But the real story, why is the US government worried about China’s position in that space?

What is the value there? And maybe it is access to real resources, but this brings us to MMT now because it’s really a story of real resources and the United States is flush with real resources. So why does the United States government do this? That seems to be what the real battle is about, right?

[00:34:42.330] – Liang

Yes, to some extent. I think you’re totally right. There is a resource grab. We know that Taiwan has a very strategic, important position in semiconductor industry and so on. And I totally agree with you also with the industrial military complex. That’s why it’s so easy for the United States to pass the national defense budget  $770 billion plus $80 billion of intelligence services.

And yet it says they cannot provide Medicare for all. You cannot give free college, you cannot have green new deal, all these other claims. But, on the other hand, I think its also that this reminds me of Babylon, this idea that these vast interests, they’re able to utilize imperialism, patriotism that have this external common enemy in order to subordinate the mass, the work man instincts against this predatory instinct.

So, I believe you see how this is playing out by demonizing China and, say, how it could create a regional instability and create this global hegemon. I think it’s really profiting the military and industrial complex on the one hand and also have that ideological control on the other hand. And I think again, all these claims are really at odds with reality.

These Asia, East Asia, Southeast Asia have not been as stable as it is now compared to, let’s say, in the 70s, all the major economies like Japan, they have reduced their percentage of GDP on national defense. And Singapore Prime Minister directly tell the United States, don’t mess with this region. We wanted to solve the problems on our own through multilateral, peaceful negotiations and whatnot.

The US has no stake in here. So there is a profit motivation, but there’s probably also other motivations as well. It’s always easy to set up this common enemies to advance party interest, be it Republicans or Democrats. So, that’s why you find this a very unprecedented bipartisan. If you can find anything that has bipartisan support is anti China, which is very, very sad because I think they’re really working against the actual, the real interests of people.

Not to mention how it really provoked the anti China, anti Asia mentality. In San Francisco last year. The anti Asian crime has gone up by 560%.

[00:37:18.260] – Grumbine

Wow.

[00:37:18.760] – Liang

Outrageous number by any means. And so I think it’s really counterproductive. It’s very pernicious to the US economy, to the US people, right? To Americans. I really appreciate that you bring this up and try to caution against that we should not be just listening to all these anti China propaganda.

[00:37:39.630] – Grumbine

It’s tough because that’s what you’re fed. So, a few years back, Roseanne came back onto the air after it had been canceled for years. And the very first episode was right after Donald Trump had been elected. And Roseanne and her sister are fighting about the fact that the sister voted for Jill Stein and didn’t vote for Hillary.

And Roseanne says to her, the problem with your ideas, eventually you run out of other people’s money. Seems like it’s harmless. It’s just a sitcom. There’s no political angle here. But you had over 30 million people watch this show and all chuckle at, of course, you run out of other people’s money. You talked about China only spending .9% of their GDP on social services.

What could China do to grow its social spending and protection of its citizens given an MMT lens? It doesn’t seem like China has really embraced MMT. If you were to analyze China and that social spending through an MMT lens, walk us through that. Help me understand that.

[00:38:51.270] – Liang

Right. So when it comes to MMT debate, I think, in China, it’s actually making a lot of noise these days, even at the very high level within the government, there are the policymakers, there are the economists, there are the cost consultants, they’re all, in some ways, debating about MMT. So, there is argument, on the one hand, to say, okay, MMT is purely wrong.

There’s still this very intrenched mainstream idea that money is a commodity. It, then, becomes fiat. But money has nothing to do with the state or credit. And this idea that MMT just means that unlimited government spending and MMT is going to cause hyperinflation. So that is one camp of the debate. The other camp says, well, MMT does work.

This is mostly the policymakers, right, that they understand how exactly money is created and how fiscal operation’s done. But then what they’re arguing is, though, that MMT could be a policy guide only if the traditional monetary policy doesn’t work, like when interest rates are that low, you can’t go much lower. Quantitative easing failed to work. Then, let’s think about what MMT says.

Let’s use the fiscal stimulus or use the fiscal spending. And, in China, well, the interest rate is still relatively high, so we still have the room not to go that route. We can still rely on the traditional monetary policy. So, that’s the second camp. And then the last camp, of course, is more at the, I would say, academic circle in for example, Renmin University, one of the very famous, pretty influential University where they have Professor Jia GenLiang, for example, who truly understands MMT.

So, I think when you ask about if it’s embraced in China, I would say at least in the policymaking and academic circle, there are all these three different camps, which is not unusual. I think it’s pretty divided to real. And then you ask a question about the government spending priority. It is very interesting. China’s government has never been shy from spending on infrastructure or fixed asset investments.

About 40% of the total, I would say gross capital formation in China comes from the government. So, that amounts about 16% of the GDP. So, the government is investing about 16% of the GDP every year annually. They have also, for example, in order to promote technological innovations, they have built the so-called government guidance funds since 2015.

Now you have thousands of these investment funds. They’re getting ready to invest in semiconductor industries, for example. Right now, I think the number says by the end of 2020 has about $1.4 trillion in that investment fund. And so I would say at least a big chunk of it goes to the semiconductor industry. So let’s think about the US Competitive and Innovation Act, $50 billion.

That’s just a joke. But anyway, so, I do think maybe part of from that Soviet Union model where this heavy investment, industrial production is the focus of the government’s spending, for good or bad. And then, at the same time, I think the government is lacking in providing social spending, social services, in health care, in education and unemployment insurances and elderly care and all these.

I think one of the difficulties in China is they farm out a lot of these social spending to the local government level. And as we all know, the local governments are not sovereign governments. It does not have that sovereign government monetary power.

[00:42:36.990] – Grumbine

Currency users. Yeah.

[00:42:39.290] – Liang

Yes, exactly. They’re the currency users, not issuers. And, so, that, I think, created the problem. So, a lot of these social spending is being unfunded or underfunded. And then the local government debt, as many of the economists have pointed out, becoming, quote unquote, unsustainable. So, I think it’s important for the central government to not only just think about this grand investment in these hard infrastructures, but also, importantly, to, in some ways, centralize and federalize.

Some of this social spending right now at the local level or the other way would be re-disburse the funds to the local government level and allow them to provide these essential, important services. The local governments are responsible for about 85% of all these social spending, and yet they’re taking less than half of the tax revenues and very little from the central government’s grants.

So, that is clearly a mismatch. And I think that is one of the reasons why, on the one hand, you see the government is not constrained by the financial resources, but on the other hand, you see that why are they not spending enough in social services and what not? I think it’s really the misplaced responsibility and financing power between the central and the local governments.

[00:44:03.270] – Grumbine

How much of that is socialized versus in the US? We’re beginning to uncover because of the way our political system is, we have a lot of things that are said that are incorrect. In China they don’t have the same political structure and insane amounts of campaigning. So, what would be the reason for underfunding the local governments?

[00:44:30.090] – Liang

Yeah, I think that’s a great question. What I can think of for one is, again, there is a political reason that the central government wants to have that fiscal power. So they are the ones that take over most of tax revenues from the localities. So there is this desire at a central level to centralize that fiscal capacity. And then the second reason I think has to do with the institutional reasons, as we know in the past, before the early 1990s, up until 1995, I would say, the state owned enterprises are the main provider of a lot of social services to the workers.

But that has changed. State enterprises have undergone years and years of so called reform and they are asked to reduce the kind of social responsibilities. So they used to provide housing, they used to provide everything pretty much from childcare to elderly care. The state owned enterprises does it all. But now it’s no longer the case and there has not been a centralized efforts to put in all these other social services in place of the state owned enterprises.

And then finally I think there’s also some cultural reasons that as we know in China, for example, the child care and elderly care, to a great extent, are taken care of by the extended families. So, there wasn’t such an urgent need to say we don’t have elderly care, the old people don’t have enough public pensions to live on because, in the past, again, extended families and the life savings have supported many of these retirees.

And medical is similar, that there have been all these at the rural level, at the country level, at the state level, there are many of these small kind of clinics. They’re extremely cheap. I remember going back to China and trying to fix the teeth, some kind of emergencies that I need. And what I discover is even out of my own pocket, the cost is so much lower compared to the States. Now, that also is gradually changed.

So, like I mentioned earlier, the so-called 3 mountains, people find out it’s increasingly difficult to pay their medical bills, their mortgages or rentals and also tuition for their kids. And so, I think now is to the extent that the government is looking into this and so, hopefully, they will understand this is something that they really need to provide in order to even remotely achieve that so called common prosperity.

[00:47:04.590] – Grumbine

That’s fantastic. One of the issues that I want to touch on is how China’s central banking works, how they create money and how that money gets into the fiscal space. We know what it’s like in the US based on an understanding of Modern Monetary Theory and Treasury Federal Reserve operations. Is it the same in China or do they have a different way of doing things?

[00:47:33.810] – Liang

Yeah, that’s a great question. I think there are many commonalities. So, it’s the same way that money creation, partly from the direct fiscal spending that there is this coordination between the central bank and the treasury. So, when treasury spends, the central bank will add to the reserves, will increase the private account balance. So, that is the same thing and there is definitely the internal monetary creation through the banking sector that is also pretty much the same.

I think a couple of years ago I organized a special issue in the Chinese economy, and I have some Chinese scholars talk about money creation in China, which again, when you look at the mechanisms, is awfully similar with the United States. I would say the difference, though, is the Chinese Bank lending or the Chinese credit creation has more of not just the quantitative.

So, for example, you could change the effective policy rate, the funds rate in China, the PBOC rate, the medium term lending rate, and whatnot in China. Or they also change, for example, reserve required ratio, thinking this could limit the quantity of credit, but all it does is to change the cost. And then they also do things like really direct lending or the window guidance, a lot more in China than in the United States.

So, in other words, the central bankers can tell the state owned commercial banks where they should reduce their lending to,, which sector, for example. So there’s a lot more window guidance, a lot more qualitative guidance on where the credit should go. So, as we know, the Chinese banking system is quite different from the United States because the top four or even five commercial banks are state owned and they account for about 35.5% of the entire banking assets and also about 30% of bank lending.

So, these state owned commercial banks respond very much to the central bank’s directives. So, in some ways, I think that credit creation process in China is much more qualitatively controlled. But again, credit money is created pretty much the same way as in the United States.

[00:49:51.690] – Grumbine

Very good. Thank you so much for doing this with me. This has been incredibly enlightening. I really love learning, and this was incredibly insightful. But I also have a great desire to change narratives and present information in a way that allows people to take action. What would be your message to American citizens who are getting fed the lines about China, how to maybe think more clearly and less antagonistically going forward?

[00:50:27.210] – Liang

Yeah, that is a wonderful question. The first thing I would say is listen to Steve. We need to have a different voice instead of watching FOX. We definitely need to bring in these marginalized voice so we’ll be able to spread the word. Exactly what you’re doing, generating knowledge and putting knowledge into action. I think that is one thing that is very much needed.

And then the second thing I would say is talk to the people. When Pandemic is over, hopefully soon. When China opens the door, please go to China, travel. Go to the local places, enjoy the nature, enjoy the culture, talk to people. Then you will see the Chinese are the same. They do have only two eyes and one nose and one mouth. They’re not monsters.

So I think that people to people communication is so important and when it’s happening in the political circle, we know that’s going to always be like that. But we could have a different understanding and appreciation and find ways to coexist or co-thrive if we were just be more tolerant, to be more understanding and to really see what people are doing.

I would say Chinese people are extremely hard working and they’re also very friendly. China is growing big and so that does create a lot of, I would say, maybe disturbances like this metaphor, that the world economy is an ocean and China is a big ship. So, wherever the ship goes, it’s going to create a lot of ripple effects. But China is not, like, going to take over the world.

China was a big economic secrecy back in 1820. It did not go out to fight any war. There’s no single war that China fought proactively. So I think it’s important to keep all this in mind that China does want to bring stability and prosperity to its 1.4 billion population. And China is nowhere to the extent that could rival the United States in military or even economic levels.

The per capita of GDP in China, that’s still about 1/4th of the United States. And China is leading in some technology like AI application or electric vehicles in some ways. But the US is still a, I say, tech and economic superpower. And I think again, there is healthy competition and constructive competition that we can all shoot for. Competition is not a bad thing, but I definitely think we need to understand each other better and not go with that confrontational path that some politicians would like to see happen. And I think that is a grave mistake.

[00:53:11.790] – Grumbine

Well said. This is just an absolutely wonderful conversation. Before we started this podcast, I had an outline two years long for what this interview could be like, so I have a whole bunch more I want to talk about. So you will definitely come back. I’m so happy that your kids liked the show and you listened to it and you came on. Please pass on my appreciation to your husband. I love Eric as well and so much knowledge in one house, but I’m glad I have both of you.

[00:53:42.810] – Liang

Oh, thank you for saying that. Thank you very much. I always say that, yes, 90% of knowledge creation this household from me, 10% goes to Eric, but yeah, who doesn’t like Eric. But thank you so much. I’m so relieved to know that this is not my last time. Hopefully, I didn’t screw this up too much. So, thank you so much for the wonderful opportunities. Such a pleasure.

[00:54:05.310] – Grumbine

It was my pleasure. Believe me. Please catch us every Saturday morning 8:00 a.m. Eastern standard time. The release of the pod goes out on all the major platforms. Don’t forget to subscribe. These are good podcasts. I’m hoping they are useful to you and if not message us. Send me an email. Let me know. Am I getting things right? Am I getting things wrong?

And just remember we are funded by your donations. We make all these things free. We do not put them behind a paywall because the information is too important. So with that, Yan, thank you so much for joining me today. This is Steve Grumbine with my guest Yan Liang and we are out of here.

[00:55:10.860] – End Credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Andy Kennedy. Macro N Cheese is publicly funded by our Real Progressives Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.