Prof. Lu Feng: Global Significance of China’s Economic Rebalancing
Jun 20-2024
The internationalization of Renminbi (RMB) is not separable from the catch-up of the Chinese economy through reform and innovation, and nor is it separable from the macro-economic rebalancing in recent years to solve the conflict between strong supply and weak demand, said Prof. Lu Feng of the NSD in an event in April, 2024. The event examined the outlooks of the global economy, finance, and governance on the occasion of the 80th anniversary of the Bretton Woods System.
Despite its positive role in the past, the Bretton Woods System needs reform and reshaping as a result of the accumulated conflicts brought about by the unbalanced economic development worldwide. Being the most important emerging market, China’s economic modernization and RMB internationalization can be expected to play a special role, said Prof. Lu. He noted that for a sovereign currency to internationalize, it has to meet international standards and make global achievements, but it also has to build solid groundwork domestically.
Prof. Lu then analyzed the major causes of strong supply and weak demand, and pointed out that such a pattern, though not uncommon historically, has persisted relatively too long this time around. Looking back into a relatively long period, he believed that China’s monetary, financial, and especially fiscal policy haven’t exerted their full effects on stimulating residential incomes and consumption growth.
To realize economic rebalancing requires coordinating short and long-terms goals and simultaneously implementing multiple policies, he said. Macro-economic policy should get its counter-cyclical function into full play. In the mid to long-terms, it is necessary to moderately reduce the use of public resources in boosting supply capacity while resorting more to market mechanism and the forces of micro-entities in spurring innovation and the development of new-quality productive forces. The crux lies in deepening the reform of the public fiscal system, so as to amplify fiscal support to the social security system and strengthen the welfare coverage for low-income groups in both urban and rural areas. Continuous efforts should be made over the course of two five-year plans to significantly raise the ratio of residential consumption to GDP.
China’s industrial upgrading and overall economic improvement entail that RMB internationalization has become one of the realistic options for refining current international monetary system. Sluggish domestic demand leads to trade surplus, which, in the form of savings, is ‘exported’. Paradoxically, this shores up current international monetary system. In other words, the profound potential of RMB internationalization brought about by China’s productive growth and supply side upgrade can be effectively tapped only when the short plank of insufficient demand is rectified to achieve balancing interactions between supply and demand as well as full employment growth.
RMB internationalization has made preliminary headway, said Prof. Lu, adding that some structural constraints persist. The focal point, he said, is not about de-dollarization but rather about emerging currencies building up their strength. This is because a counter-intuitive trait of the international monetary system is that the old won’t go until the new arrives, said Prof. Lu.
