At Present, China'S Economy Has Important Reference.

IMF researchers' Reflection on the two major policy proposals of neoliberalism is of great reference to the current Chinese economy. First, the Chinese government should cautiously open up capital account. If necessary, capital flow management should be used as an important macroeconomic policy tool. Secondly, although the level of Chinese government debt has been rising rapidly in recent years, the Chinese government should not be subject to fiscal tightening.

What has China learned from the reflection of IMF? What has China learned from the reflection of IMF?

Recently, the deputy director of the IMF research department, JonathanOstry and her two colleagues, published in the 6 issue of the 2016 issue of Finance and development in the 6 issue of the journal "IMF: whether it is oversold" (Neoliberalism:Oversold), criticized the so-called new liberalism's policy recommendations (capital account liberalization and fiscal contraction).

After the publication of this article, it has been widely discussed in the international community.

At the end of May 2016, the financial times also released editorials that IMF should not openly criticize neoliberalism.

This article will first briefly introduce the main points of the author above, and then comment on this view, and finally sum up the experience and lessons of relevant discussions for China.

Reflection of IMF researchers

Ostry believes that the new liberalism has two cornerstones: first, it should strengthen competition through deregulation and opening domestic markets, including financial markets; secondly, it should weaken the role of the government through privatization, restricting government spending and borrowing.

It is not difficult to see that the policy recommendations for capital account liberalization are derived from the former cornerstone, and the fiscal contraction policy proposal is the two cornerstone of Yuan Zidi.

However, the authors immediately pointed out that, first of all, under the premise of examining many countries, the profits of these two policy proposals are blurred. Secondly, the cost of the two major policy proposals is very significant, especially the two major policy proposals may significantly increase the inequality of income distribution; thirdly, in turn, the inequality of income distribution will damage the level and sustainability of economic growth.

Therefore, the author suggests that the international community should reflect on the applicability of these two policy recommendations.

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In terms of liquidity, the author points out that although cross border direct investment usually brings economic growth, short-term capital flows such as securities investment or bank lending usually neither bring economic growth nor spread risk better, but will aggravate the frequency of economic volatility and crisis.

In addition, empirical evidence shows that financial liberalization, including capital account liberalization, will significantly exacerbate inequality in income distribution.

Once the crisis breaks out, the allocation effect will become more significant.

In terms of fiscal contraction, the author points out that for countries with a certain fiscal policy space, if economic growth is sluggish, fiscal contraction will do more harm than good.

In order to reduce debt levels or reduce fiscal deficits, a country may need or increase taxes that may distort economic behaviour or reduce productive expenditures.

Moreover, austerity often exacerbates unemployment and undermines demand.

According to the literature cited by the author, on average, if the scale of fiscal contraction reaches 1 percentage points of GDP, the long-term unemployment rate will increase by 0.6 percentage points, and the Gini coefficient measuring the imbalance of income distribution will increase by 1.5 percentage points in 5 years.

Comments on fiscal contraction

Whether it was during the -1998 financial crisis in Southeast Asia in 1997 or during the European sovereign debt crisis in 2010 -2012, the prescriptions issued by creditors to the crisis countries, including IMF, included fiscal tightening.

However, the result of fiscal tightening in the crisis countries is that economic growth continues to shrink, unemployment is aggravated and income inequality keeps rising.

This is why Southeast Asian countries generally resist foreign negative shocks by accumulating foreign exchange reserves after the financial crisis in Southeast Asia. They no longer trust IMF.

For creditors, it is clear to ask the crisis countries to tighten their finances. First, these countries must reduce their deficits and debts to improve their solvency. Second, if these countries can reduce their deficits and debts, they can enhance their confidence in the crisis countries.

But the final result is that the economies of these countries have further fallen into recession, and the confidence of the parties concerned in the crisis countries has further deteriorated.

The reason for this backfire is simple.

Measuring the solvency of a country is not the absolute size of debt, but the ratio of debt to GDP.

Fiscal tightening can, of course, reduce the absolute income of debt, but at the same time, it may also reduce the denominator of GDP.

A recent IMF study shows that past studies probably underestimated the fiscal multiplier (or underestimated the negative impact of fiscal tightening on GDP growth).

From this perspective, to improve the solvency of a country, it is best to help the country recover its economic growth.

To restore the momentum of economic growth in the short term, fiscal relaxation rather than fiscal tightening is usually needed.

Therefore, the policy recommendations made by IMF to Greece and other countries in recent years are that excessive fiscal tightening can not be made in the near future, but there should be a convincing fiscal consolidation plan in the medium term to boost market confidence in its solvency.

For countries such as Germany, the United States and the United Kingdom, where the fiscal space is still abundant, IMF's proposal is that we should break through the relevant resistance and further expand the fiscal deficit, especially the government's spending on infrastructure investment.

The pformation of IMF's attitude towards cross-border capital free flow is based on a series of experience and lessons from emerging market countries.

In fact, since the debt crisis in Latin America in 1980s and the European sovereign debt crisis in 2000s, cross-border capital flows have been playing an important role in the beginning of these crises.

It is true that countries with different crises have different vulnerabilities on the economic fundamentals. For example, Latin American countries borrowed large amounts of foreign currency denominated debt in 1980s, and there was a continuous current account deficit in Southeast Asian countries in 1990s. In 2000s, the level of external debt of the countries in southern Europe remained high. However, it is undeniable that a large number of cross-border capital flows before the outbreak of the crisis, and a large number of cross-border capital outflows after the outbreak of the crisis, magnified the volatility of these countries' macroeconomic and financial markets, and intensified the intensity of the financial crisis in these countries.

In other words, although capital account liberalization is not a necessary and necessary condition for the outbreak of financial crises in these countries, they are usually one of the necessary conditions for the outbreak of financial crises in these countries.

After the current global financial crisis, the major developed countries realized zero interest rates one after another, and issued a large-scale quantitative easing policy. The scale and volatility of short-term capital flows all over the world increased significantly, and the impact on the countries concerned became more intense.

It is against this background that IMF changed the view of capital flow management before and after 2011.

They no longer believe that the free flow of capital is optimal for all countries. Instead, they point out that for emerging market countries, capital flow management should be one of the important tools for emerging markets to cope with cross-border capital going forward and coming together with macroeconomic policies and macro prudential supervision. In some extreme cases, capital flow management may be the only effective tool.

In fact, the change of IMF's position is consistent with the conclusions of many mainstream economics research literature.

At present, the basic consensus reached in international economic circles on capital flow control includes at least: first, there is no necessary connection between free capital flow and economic growth; second, only when a country's financial market develops to a certain threshold level, can free capital flow lead to economic growth; third, short term capital expansion usually aggravates the instability of real economy and financial market (which means that the former produces a certain negative externality), so it is necessary to manage it.

IMF researchers' Reflection on the two major policy proposals of neoliberalism is of great reference to the current Chinese economy.

First of all, the Chinese government should gradually open capital account cautiously. If necessary, capital flow management should be used as an important macroeconomic policy tool.

Since the second quarter of 2014, China has begun to face a continuous capital account deficit as the expectation of RMB appreciation against the US dollar reverses its expectation of depreciation.

The expectation of RMB depreciation and short-term capital outflow are mutually reinforcing and causal factors, which have become an important challenge for the Chinese government.

Especially after the 811 exchange reform in 2015, with the expectation of RMB devaluation and the increase of short-term capital outflow, the fluctuation of domestic financial market has resonated with the fluctuation of international financial market and has made a significant impact worldwide.

Then, on the one hand, as the Central Bank of China stepped up control over cross-border capital flows, on the other hand, the depreciation of the US dollar against the US dollar weakened because of the dollar index's rise and fall.

This shows that as an economy that is undergoing economic pformation, financial market is still not sound, and financial risks are constantly dominant, we can not voluntarily abandon the tool of capital flow management.

Second, despite the rapid rise in the level of Chinese government debt in recent years, the Chinese government should not be subject to fiscal tightening.

At present, the total debt of the Chinese government accounts for about GDP of 60-70% (including implicit debt). Although it is at a relatively high level in the emerging market powers, it is still at a relatively low level compared with the developed economies.

On the one hand, the Chinese government should reduce taxes and increase effective expenditures simultaneously to stabilize economic growth by expanding aggregate demand. On the other hand, the Chinese government should raise funds through issuing bonds, rather than continue to bank credit financing.

Despite the potential for growth in China's economy, structural reforms, including ownership reform, land reform and factor price reform, are imperative.

However, in order to create space for structural reform, avoid excessive economic downturns or disrupt the progress of China's reform and development, it is also indispensable to properly manage the macro demand management by relaxing fiscal policy.