China Finance 40 Forum (CF40) Profile picture
Jul 28, 2020 6 tweets 2 min read Read on X
Since the 08 financial crisis, real interest rates of many advanced economies have fall into negative territory. But China's real interest rate has risen notably since 2012 after going down all the way in 2000-2011, according to CF40 #Macroeconomic Policy Report: 1/6 Image
The drop of real interest rate in China in 2000-2011 was caused by several reasons, including longer life expectancy, as well as lower dependency ratio, rising income inequality and fall of the relative prices of capital goods. 2/6
Also, the period between 2000 and 2011 saw the peak of industrialization in China, when the government generated more than expected income, household income soared and saved it passively and companies greatly narrowed the difference between saving and investment. 3/6
From 2012 to 2019, many of these factors that can cause decline in real interest rate disappeared, and the alleviation of financial constraints and the increase of governmental expenditure also pushed the real interest rate up. 4/6
However, the changes in real interest rate do not necessarily lead to the neutral rate of interest that is consistent with full employment. In fact, real interest rate was lower than neutral rate of interest in China in 2000-2011,and it took just the opposite path in 2012-19. 5/6
An appropriate combination of monetary and fiscal policies would be required to narrow the gap between real and neutral interest rates. new.cf40.org.cn/uploads/ZB2020… 6/6

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More from @ChinaFinance40

Feb 22, 2023
According to CF40’s latest macroeconomic quarterly report ‘China's Countercyclical Fiscal Policy and Sustainability of Government Debt’, China has never heavily relied on budgetary spending to provide counter-cyclical stimulus. 1/5
Instead, it mainly adopts a model where local governments, financial institutions and local government financing vehicles work together to boost investment. 2/5
Statistics show that such a model has helped China stabilize its economic growth, but also increased the broad government debt to GDP ratio, raising concerns about the sustainability of government debt. 3/5
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Feb 22, 2023
China could consider implementing negative individual income tax (IIT) to boost consumption and employment, advises CF40 research department. 1/4
It means that the government provides taxpayers with a certain amount of subsidy when the level of working income is lower than a given threshold. 2/4
A CF40 policy brief proposes a two-pronged policy scheme consisting of rewards and subsidies for businesses adding new jobs on one hand, and negative IIT on the other hand, which could drive spending and employment without causing excessive fiscal expenditure burdens. 3/4
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Feb 21, 2023
The PBC's "benign neglect," an indirect policy tool devised in 2022 to influence the value of the RMB, was quite successful. It allows the market to determine the exchange rate while retaining capital controls as a last resort.1/5
It should be the most effective currency strategy for China's central bank, said CF40 Advisor Yu Yongding in a recent seminar.2/5
China should maintain a floating exchange rate regime to bring out its role as an automatic stabilizer while maintaining necessary capital control as a last resort.3/5
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Feb 17, 2023
Despite the shrinking working-age population, there is a tremendous pool of surplus rural labor in China., said Caifang, Chief Expert of National Think Tank of Chinese Academy of Social Sciences. 1/5
Many analysts predict that China will not have a rapid growth rate in the future or emerge as the largest economy in the world because its working-age population and total labor have stopped growing. 2/5
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Feb 16, 2023
#China could consider implementing negative individual income tax (IIT) to boost consumption and employment, suggests CF40 Research Department in a 2022 policy brief ‘Negative Individual Income Tax: Some Thoughts on Policies to Drive Employment and Consumption’. 1/4
It means that the government provides taxpayers with a certain amount of subsidy when the level of working income is lower than a given threshold. 2/4
The policy brief proposes a two-pronged policy scheme consisting of rewards and subsidies for businesses adding new jobs on one hand, and negative IIT on the other hand, which could drive spending and employment without causing excessive fiscal expenditure burdens. 3/4
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Feb 3, 2023
Given China’s macroeconomic environment in December 2022, the following policies should be taken to boost China’s economic growth and deal with potential risks, said ZHANG Bin, CF40 Nonresident Senior Fellow: 1/5
1. Lower interest rate by 25 bps each time until the employment and growth targets are hit.
2. Issue new types of fiscally subsidized bonds and policy loans to support investment in public goods and quasi-public goods infrastructure projects that feature limited returns.2/4
3. Set up special funds to help market entities battered during the pandemic get back on their feet; increase the amount of living allowance for low-income groups. 3/5
Read 6 tweets

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