Interview: How a Massive Injection of Money Could Kick-Start China’s Growth

Finance professors Patrick Bolton and Huang Haizhou propose that China can address its debt issues by applying corporate finance principles, specifically through the People's Bank of China (PBOC) issuing money to recapitalize banks and resolve local government debts [para. 1][para. 2]. This approach, highlighted in their book "Money Capital: New Monetary Principles for a More Prosperous Society," likens national monetary economics to corporate finance, suggesting that money can function as the equity capital of a nation, akin to shares in a company [para. 2][para. 3].

The central idea is that by increasing the money supply, local governments will have more fiscal room to invest and banks will have additional funds to lend for productive purposes. This strategy could alleviate the current economic stall caused by China's massive debt overhang and underutilized production capacity [para. 3][para. 7]. The proposed method involves the PBOC buying out nonperforming loans (NPLs) from banks, which are burdened by debts primarily from local governments and real estate developers [para. 8][para. 9]. By transferring NPLs to debt resolution agencies and either writing down the debt or recapitalizing, financial space can be reopened for new investments and spending [para. 10].

Bolton emphasizes the need for financial discipline to avoid repeating past mistakes of excessive and rapid investments, particularly in certain sectors like real estate [para. 11][para. 12]. He suggests adhering to the net present value (NPV) principle, a financial measure for evaluating the profitability of investment projects, which ensures that investments are worthwhile and likely to yield returns [para. 12][para. 13]. While the approach essentially provides local governments with more room to spend, it is crucial to maintain financial discipline, particularly in those that have previously overspent [para. 17].

Bolton and Huang build on the notion that countries, like corporate entities, should pursue investments with positive NPV. The PBOC should print money primarily to fund initiatives that create economic value [para. 18][para. 19]. Because these investments expand real output, the money supply increase should not necessarily cause inflation, a departure from traditional monetarist theory that links money supply growth to inflation [para. 20][para. 21]. They argue that China's rapid economic expansion over the past 30 years did not lead to high inflation due to the effective use of money supply to finance valuable investments [para. 22].

Moreover, China's economy requires sustained investment to modernize and transition towards greener practices [para. 24]. The debt overhang problem currently impedes tapping into the country's growth potential, compounded by deflationary pressures that actually increase the real debt burden as unemployment rises [para. 26]. By solving the debt overhang, consumer behavior is likely to shift from saving to more spending, thereby mobilizing the economy [para. 27].

This innovative monetary approach, inspired by corporate finance, suggests a connection between controlled money supply growth and long-term economic prosperity, even amid traditional concerns about inflation. Emphasizing quality investments with disciplined financial management could indeed offer China a viable way forward in addressing its fiscal challenges [para. 19][para. 26].