Anomaly of a Recovery

By John Mauldin 


We did the first Strategic Investment Conference 18 years ago. 

I remember one of the partners in the firm that cohosted the event telling me as I walked up to the stage, “John, it doesn’t get any better than this. 

Don’t screw it up.”

He was wrong. 

Every year the attendees told me it was better than last year. 

About 10 years ago people started saying and writing the SIC was the best investment conference they had ever been to anywhere. 

And luckily, every year has been better. This year?

This year the SIC is the GOAT—the Greatest of All Time. 

Just look at the speakers. Tell me when there has ever been an investment conference that had such a lineup top to bottom. 

You might have another favorite speaker, but the totality of talent? 

I am simply salivating.

You’ll also get video and audio (podcast form) recordings, transcripts, and slides, so you don’t have to be there live for all the presentations. 

Livestream plus recordings, alternating days to give attendees time to process, break times during the event days, no travel involved... 

I don’t know what we could have done to be any more accommodating to attendees’ needs. 

And then, of course, there’s the heavily discounted price for your SIC 2021 Pass. 

I don’t know what else I can do to make it any better. 

This truly is the Greatest of All Time. 

It’s as if Bird and Jordan and Lebron could all play in one game. 

You know you want to be there. 

Sign up now and I’ll see you at the SIC!

Capital Record: From Muddling to Stumbling

David Bahnsen is one of the most original thinkers I know, which is why he is all over TV and podcasts, and is rated one of the best money managers in America. 

His father was an esteemed theologian back in the 1970s and 1980s whom I had the privilege to personally know and publish. 

He tragically died way too early, and David had to pick himself up at a very early age to get where he is today. 

There is a long story there, and I can’t tell you how deep my respect goes.

As far as original thinking goes, the apple did not fall far from the tree. 

David does a podcast for National Review called Capital Record

We did a two-part series. 

The following is an edited partial transcript of the first part. 

Next week I will share some of Part 2.

Please note that some of the best ideas here will be David’s. 

I always learn a lot when I am with him. If there is something in brackets […] it means I inserted it today. 

Let’s jump in:

***

David Bahnsen: 

Hello and welcome to another episode of Capital Record, very excited today to have what I believe is one of the most influential economists and writers in my adult life, who I've been reading religiously for my entire career, is a very well-known financial pundit, macroeconomic thinker, and hopefully so much of his wisdom is going to come out in our conversation. 

The gentleman I refer to is John Mauldin. 

John also penned a book in 2003 called Bull's Eye Investing

I read John's entire book and was really quite moved by his rare ability.

As some of you know, financial writers often can fall into a trap where they go for a brand. 

I'm going to be a permanently optimistic guy or often in the newsletter publishing world, the brand of being that doom and gloom pessimistic person all the time. 

John carved out a niche as an actual free thinker, which is all too rare, a lot of objectivity. 

He can be wrong. 

He can be right like any other economist, any other thinker, any other writer. 

But he is right or wrong out of an earnest pursuit of truth and earnest pursuit of objective understanding of economic challenges and situations. 

He intellectually wrestles with topics. 

And I've learned a great deal from John. 

We've become very close friends and have dined together for hours upon hours, many times, discussing many of the things we're going to discuss in the podcast today and have a friendship that enables us to run different things past each other as we seek to better understand the economic challenges of the day. 

So he's involved extensively in capital markets and in a number of aspects of the investment field.

But John is a thinker and writer and has been a great influence, hopefully, on many of you and certainly on myself. 

And so I'm going to invite John into a conversation today around the economy, the last 20 years of economic challenges, the next 20 years of economic reality. 

And we're going to dive into these things and see where the conversation goes. 

So we're looking forward to another episode here with you of Capital Record.

John, I've been reading you since the very, very beginning that you've been putting out macroeconomic commentary. 

Since then we’ve had Y2K and a tech crash. 

We had a financial crisis. 

We've had all kinds of Federal Reserve machinations the last 10 years. 

We've had ups and downs in China. 

And now we've had COVID and here we are. 

You coined the phrase “Muddle Through,” I believe about 20 years ago now.

John Mauldin: 

I'm getting old.

David Bahnsen: 

Yeah, I'm just playing catch-up with you. 

But the Muddle Through Economy, would you say that description has been pretty accurate for what we're going through?

John Mauldin: 

Well, let's go back 20 years ago and look at the context. 

In 2001 we’d come off a recession and then we had 9/11, which gave us even more of a recession. 

Now I am like you, I'm a big technological optimist. 

I am really long humanity and maybe we'll get into that. 

What I mean by long humanity, I think human progress is on an accelerating pace. 

But that being said, I'm [currently philosophically] short government. 

I didn't see how we would get through the rest of the decade without another one. 

I certainly wasn't expecting the level of the traumatic Great Recession in 2007–8. 

But I said then we're going to muddle through the decade, likely to have 2% GDP growth for the entire decade. 

People called me too bearish. 

And as it turned out, I was an optimist. 

We did 1.9%.

Economics 101 says that GDP is productivity times the number of workers. I mean, it's just a simple number. 

The number of workers was falling as Boomers retired and we had milked a lot of the tech-driven productivity gains. 

Consumption and services became such big parts of the economy, and they aren’t as responsive to productivity growth as manufacturing had been.

Looking forward to the 2020s, I think 2% growth will be hard. 

I think 1% to 1½% growth will probably be more characteristic because technology will be eating the service jobs and other low-income jobs.

David Bahnsen: 

Let’s separate the economic growth challenges coming out of COVID from the really macro. 

When we take a step back and look at the 20 years we've just lived through, my own view is that we had a certain degree of real GDP growth that was becoming a new trend line post financial crisis, and it was less that the postwar trend. 

And then, of course, the COVID moment pulled us off that number. 

And now, as you point out, we're going to have an anomaly of a recovery because of everything coming back online in this post-vaccine society. 

But then we're going to pick up where we stopped.

But let's fast-forward to the other side of the recovery, and this is where I'm going back to your muddle through point of 20 years ago. 

We had a kind of asterisk recession due to COVID, and we're going to have a footnoted recovery because of everything rebounding. 

But when we get back to some degree of normal, we're going to have a national debt at least $6 trillion bigger than it was, plus bigger deficits of well over a trillion a year, even after this initial cost absorption. 

Has all this changed the way you see the next 20 years?

John Mauldin: 

I actually changed my “muddle through” metaphor here about a year ago. 

I think this decade we’ll be stumbling through instead of muddling because, as Milton Friedman said, the most permanent thing in the world is a temporary government program. 

We're going to run, this year, well over a trillion in off-budget deficit spending and trillions more in regular budget deficit. 

We're going to be $40 trillion in debt by 2025. 

That’s 180% debt to GDP. 

That looks like Japan and Europe.

David Bahnsen: 

Well, John, if you get debt to 180% of GDP, and I'm not sure we'll get that high, but I accept your numbers, then it doesn't look like Europe. 

Then Europe has to play catch-up to us.

John Mauldin: 

They have worse problems than we do. 

They’re way behind the vaccination curve. 

And that's not good for us because we need the world to get vaccinated. 

All that death does slow down the economy. 

That's why I said if we could get 2% growth this decade, I'd just book it right now and say thank you.

Apolitical Answers

David Bahnsen: 

Let's offer our listeners a little history. Japan experienced a self-induced asset bubble, the predominant characteristics of which were insanity and euphoria around real estate and asset prices in the late 1980s. 

After that bubble, which burst violently, Japan found itself in a deflationary spiral which it chose to treat with excessive, you could argue necessary, but nevertheless incredible amounts of government debt. 

Which then exacerbated the deflationary debt spiral they've been trying to fight out of for a long time, currency weakening, and so forth and so on.

And now we are sitting here fighting debt to GDP growth. 

Europe has been fighting it since the financial crisis. 

Japan had the 1980s bubble that burst. 

What was the predicate to our situation? 

The housing crisis? 

Was it 30, 40 years of budget deficits? 

How did we find ourselves in this position? 

And you're like me. 

I think you're very capable of giving an apolitical answer. 

This is just an objective economic question. How did we wake up in this position?

[Read that paragraph again. I had an epiphany to be shared in a future letter.]

John Mauldin: 

I blame both parties. 

It's equal opportunity finger-pointing. 

In my opinion, the mistake was Greenspan keeping rates too low for too long, then letting the banks get carried away on subprime mortgages. 

That was how we created our own financial crisis. 

They created the subprime crisis because they created the conditions for it. 

Then along came Yellen and Powell and they're doing the same thing today.

David Bahnsen: 

Let me pause real quick on the Greenspan Fed’s culpability in the financial crisis. 

Are you comfortable with saying the Fed was a necessary but not sufficient condition for the crisis? 

Or do you really think they were in a singular position?

John Mauldin: 

Not sufficient. 

The rating agencies were in there, 

Countrywide and the mortgage companies, the investment banks. 

It was it was a group effort. 

If Greenspan had leaned into the housing bubble, and I don't know politically how he could have done that, other than change how we measure inflation to include home prices. 

Politically, that wasn't going to happen.

David Bahnsen: 

When you ask how could Greenspan have done it politically, part of it is by admitting there is such a thing as bubbles. 

The central bank still seems to deny that a bubble is recognizable until after bursts, which is something that empirically I find very hard to believe. 

There is a technical point about housing prices and owner equivalent rent in the inflation measurements. 

But there's also the moral hazard that, outside of the dual mandate, our central bank works under congressional authority that, 

I believe, started in 1998, not at Y2K, not at the housing crisis, and certainly not at all the things that Bernanke and Powell have done since the crisis—but in 1998 when real GDP growth was over 5% and the market was humming. 

We’d had a Russian ruble crisis. 

We were fresh off of a Thai currency crisis the year prior. 

We had Long-Term Capital Management. Greenspan cut the Fed funds rate in a smoking-hot economy under the pretense it was a preventative move. 

But what he really did was keep the stock market going.

John Mauldin: 

And create a bubble.

David Bahnsen: 

And I think the Greenspan put became codified. 

And it's no longer fair to call it a Greenspan put because Bernanke used it, too.

John Mauldin: 

Here's where dinosaurs like me have a problem. 

I can look at metrics that show the market is as overvalued today as it was back in 2000. 

Powell can't be any clearer. 

He's not going to worry about inflation getting to 3% or so. 

He's going to look right through it because he says, and I think he's right, that it's going to be transitory [over 1–2 years] because we're coming off a low measure. 

Then he says, and this is where he’s wrong, they won’t raise rates until we get back down to an unemployment level we've only seen twice since the end of World War II. 

One was during the Vietnam era when we were shipping a half a million troops off to Vietnam. 

So, yeah, we employed them in the army and those people don't count. 

And the other was in the Trump-era boom. 

Jerome Powell today is saying that's normal, it’s where we should be, and until we get back to that number, we're going to keep rates low. 

I just think that's the height of foolishness

At some point, you have to start taking your foot off the pedal.

Chicken or Egg

David Bahnsen: 

John, I want you to tell me where I'm wrong on this because I might be wrong. 

Maybe I'm not. 

We may fully agree, but this is a really good point you're bringing up, as usual. 

I get very critical when Republicans get deep into conversations about tax policy when we haven't yet addressed spending policy. 

In other words, until you figure out the size of government you want to pay for, talking about how you're going to pay for it seems to me to be a chicken-or-egg fallacy. 

And I wonder if, in our criticism of the Fed and where they set rates and all the monetary tools they use in certain crisis moments, we know they go to full-blown “whatever it takes” to keep financial markets functioning. 

I… think they mean it. 

Last March in the COVID collapse, certainly in the depths of the financial crisis, I don't think those efforts to reflate commercial paper and money markets were disingenuous.

John Mauldin: 

There are times when you actually need a central bank. 

And those were times when you needed a central banker. 

We needed them to help keep things going. 

Now they've dug themselves into a big hole and they're continuing to dig. 

They painted themselves in the corner, whatever analogy you want. 

If they allow, the US government is going to be at $40 trillion worth of debt within five years. 

A mere 1% interest rate is another $400 billion of interest. 

Or something equally ridiculous.

David Bahnsen: 

I think, by the way, your point is still valid, even at $35 trillion. 

And I'm saying, isn't the Fed doing the only thing it can do given the insanity they're being dealt by Congress? [We are already at $28 trillion today.]

John Mauldin: 

You're absolutely right. 

And this is the corner they painted themselves into by starting with keeping rates too low, by 12 people [and often just one] sitting around the table and setting the price for the most important commodity in the entire world, which is the price of money. 

They have enabled the government to spend and we spent in the Trump years, the Obama years, the Bush years, and before.

Now, here's what's the problem. 

We can’t allow rates to rise without completely blowing the budget. 

We're not going to see a deficit under $2 trillion [this decade]. 

Look at the numbers. 

I mean, the economy is going to come back. 

OpenTable this last weekend in Miami actually showed higher restaurant numbers than it did before 2020. 

That wasn't the rest of the country. 

But Miami was certainly willing to party.

David Bahnsen: 

And it's coming back everywhere. 

I agree.

John Mauldin: 

It's going to come back, but differently. 

We're changing.

David Bahnsen: 

If I told you that you can get 5% real GDP growth, which you can't and I know we can't and I know we won't. 

And even with the supply-side reforms that were done in the Trump administration, corporate tax reform, repatriation, a pretty fair amount of both energy and financial deregulatory efforts, we still got just one year of 3% growth. 

I'm not belittling it, but I'm just saying we're fighting to get to trend line and I'm asking if we could get 5%. 

Would you feel any more sanguine about the debt outlook?

John Mauldin: 

Well, yeah, because the entire premise goes back to Dick Cheney when he said deficits don't matter. 

He was technically correct, in the sense that if your deficit is below the nominal GDP growth, you're fine because you're shrinking the total debt to GDP. 

We've gone way past that and the Federal Reserve is going to have to buy more of that debt. 

It's Japanification and how long can this go on? 

When does it collapse? 

And the answer is we don't know. 

And the second answer is we really don't want to know. 

Because the only way we're going to know is when it's already happened. 

That's a very dangerous trek.

Now, the US dynamic is significantly different from Japan’s. It's significantly different from Europe’s. 

But nonetheless, that excess debt is going to slow our economic growth. 

I don't see any impetus from either political party to say we're going to lock in our spending and then try to grow our way to balance. 

There's just no limit there. 

You’ve pointed out that it looks like the next round of spending will be $3 trillion or more over 10 years. 

It's likely to get passed. 

I mean, that's just the reality. 

You're shaking your head…

David Bahnsen: 

I am. 

The thing is likely to be passed and yet perhaps not be as deficit-significant because there will be more “pay-fors” than with COVID. 

Everyone had the luxury of using the COVID moment to not even pretend they were going to pay for their spending plans. 

I think this may be less debt-impactful because they'll try to have offsets. 

But then it becomes more growth-impactful because they have to pay for it by raising corporate tax rates, by raising capital gains tax rates and impacting capital formation, economic incentives, and impacting productivity. 

And this is the supply-sider in me coming out. 

They’re trading one problem of runaway prolific spending for another problem, which is disincentivizing the only antidote we have, which is productive economic growth.

John Mauldin: 

I have written about this, I'm sure you have too. 

There's just not enough [income] taxes that we can raise to make a dent. 

In this problem, the only way we get out of this is to have a crisis and to completely restructure the tax code to where it's a VAT, probably in the 18 to 20% range, get rid of Social Security and include it in the VAT, drop the income tax rate to a flat rate on higher incomes. 

And you use the VAT to be your safety valve. 

That's the only way we can get back to a balanced budget. 

But the only way we're going to be motivated to do that is if we have a crisis, if we become Japan.

David Bahnsen: 

Well, John, here's the thing on our conversation, I think we have to do a two-parter here because I want to get into the optimism you and I both have. 

You talked about it in the context of humanity. 

I'm bullish. 

The human spirit. 

We're both, I think, bullish on the American DNA, albeit with a lot of concerns right now about the debt profile and our growth trajectory. 

But there's more to unpack.

The SIC Begins, Dallas, and New York

The SIC begins Wednesday. You want to watch and/or read. Participate in the question-and-answer. 

I can’t even begin to tell you how much mind-blowing information you’ll get. 

You will thank me when you hear it.

By the way, if you like what you read from David Bahnsen above, he will be on a panel with another multibillion-dollar investment advisor (and Louis Gave partner) David Hay and Ed Yardeni. 

They will offer very specific, “here’s what I’m doing in this market” investment ideas.

This weekend my partners Steve Blumenthal and Dick Pfister meet here with a group of businessmen to talk about investing in Puerto Rico. 

There is so much opportunity here because there are problems to be solved. 

I think you will be amazed to see what Puerto Rico becomes in 10 years.

It looks like I will be in Dallas in late May and likely in New York in June. 

I doubt my travel schedule will ever get back to the level it was, but that’s okay. 

It means I get to spend more time in paradise with Shane.

And with that, I will hit the send button and I know you’re going to have a great week because you are going to join me at the SIC.

Your salivating about everything I will learn analyst,



John Mauldin
Co-Founder, Mauldin Economics

China’s digital currency is a threat to dollar dominance

Beijing’s ambitions could spur acceptance of renminbi as main rival to US currency

Michael Hasenstab

if China takes first-mover advantage to meet the world’s demand for use of digital currencies to settle international financial transactions and own digital assets, the appeal of its CBDC could rise sharply © Bloomberg


Markets have been gripped by cryptocurrency fever. 

The price of bitcoin has attained new highs while debate has raged over the emergence of cryptocurrency technology.

But these may be a sideshow for a big developing trend — the rapid digitalisation of the renminbi.

This shift, combined with other macroeconomic and political factors, could be the key that accelerates the decline of the dollar’s dominance as the world’s leading reserve currency. 

It could also hasten the acceptance of the renminbi as the main rival to the US currency.

Central banks around the world have been grappling in recent years with the concept of digital currency technology. 

Few nations, though, are as aggressive as China in their approach to developing a so-called central bank digital currency.

Such a currency would be overseen by a central governmental authority, removing the element of anonymity that is fundamental to the decentralised, blockchain-ledger of popularised cryptocurrencies like bitcoin or ethereum. 

The theoretical benefits of government oversight of these new digital assets are numerous.

CBDCs allow for greater prevention of fraud or crime, enable instantaneous international transactions, reduce transaction costs, permit greater financial inclusion and aid the provision of direct fiscal stimulus to individual citizens.

For China, adoption of a CBDC both within and beyond its borders would allow its financial system to reduce reliance on the dollar and limit the role and oversight of foreign financial institutions and regulators. 

While many countries have started discussing the potential future application of CBDCs, China has pushed ahead with development.

In April 2020, Beijing piloted a digital currency in four cities, allowing commercial banks to run internal tests converting between cash and digital money, account-balance checks, and payments. 

The pilot programme expanded to 28 major cities in August. 

Aiming for broad circulation in 2022, China plans to test the digital currency in additional major cities, including Beijing and Shanghai, this year.

This pioneering approach should accelerate the elevation of the renminbi on the world stage. 

Some users outside China, particularly in the US, might be reluctant to use a digital currency controlled by China. 

However, early adoption in parts of Asia, Latin America and Africa is likely to proceed significantly faster.

Global reserve currencies’ relative importance historically is explained by the macroeconomist Barry Eichengreen. 

Currencies are more prized as reserve assets when they satisfy two conditions: first, when they are stable, liquid and widely used in international transactions; and second, when they are backed by a country to which another state has important security links.

China’s development in recent years puts it on a clear path to satisfy these criteria as its government has maintained relative policy stability. 

The country accounted for 16 per cent of global output in 2019, but the renminbi represented a little over 2 per cent of global reserves as of the second quarter last year.

Lack of renminbi-denominated assets for foreigners to own has inhibited its rise as a reserve currency. 

But now the renminbi will be supported by the Chinese authorities opening their $15tn domestic bond market to foreign participants. 

Greater demand for these bonds will push down yields, lowering borrowing costs.

More important, if China captures the first-mover advantage to meet the world’s demand for use of digital currencies to settle international financial transactions and own digital assets, the appeal of its CBDC could rise sharply.

China has also made great strides in invoicing its trade in renminbi. 

The security and geopolitical rationale for holding renminbi has become stronger through such measures as China’s Belt and Road Initiative financing of projects in developing countries.

Covid-19 might also be a catalyst for the greater acceptance of the renminbi as a global reserve currency. 

The economic carnage of the pandemic has sent already large fiscal deficits ballooning and driven even more accommodative monetary policy in the US.

This historically unique combination of impending massive fiscal and vaccine-led growth, where short-term interest rates are anchored at zero, will expand an already large current account deficit, putting further pressure on the value of the dollar.

The digitalisation of the renminbi will add to these economic and geopolitical factors. 

This will have a durable, transformative impact on the international economy.


The writer is chief investment officer for Templeton Global Macro 

Be prepared

The Fed should explain how it will respond to rising inflation

The Fed’s “average inflation targeting” regime remains too vague



The inevitable has begun. 

America’s consumer-price index (cpi) in March was 2.6% higher than a year earlier, when prices collapsed as the pandemic struck. 

The increase in inflation from 1.7% in February was the biggest rise since 2009, the last time the economy was recovering from a deep shock. 

Several more months of high numbers—by rich-world standards—are coming. 

The cpi could reach over 3.5% by May. 

On the separate price index used by the Federal Reserve, inflation will soon rise above the central bank’s 2% target.

The Fed is rightly unworried by cosmetically higher inflation that reflects what happened a year ago. 

Yet the central bank does have an inflation problem that will trouble it when the economic recovery produces sustained price pressures. 

A new monetary-policy framework it adopted in August dictates that it should push inflation temporarily higher than its target after recessions, to make up lost ground. 

The problem is that nobody knows by how much or for how long it wants inflation to overshoot after the pandemic. 

With the risks of an inflationary episode greater than they have been in years, the ambiguity is an unfortunate additional source of uncertainty.

The idea behind “average inflation targeting” is to make sure that inflation averages 2% over the full economic cycle, rather than falling short over time owing to recessions. 

It is a welcome corrective to the old regime, which took too long to restore the economy to health after the global financial crisis due in part to a misplaced fear of inflation.



Yet the new framework remains vague. 

Richard Clarida, the Fed’s vice-chairman, has suggested that it means waiting to hit inflation and employment goals before raising interest rates, and then operating as normal—a bit like a driver waiting to hit the brakes until the car has arrived, regardless of its stopping distance. 

Other Fed officials have hinted that they want to make up more precisely the ground lost to downturns.

But it is unclear whether to measure from March 2020, when the present crisis struck, or from August, when the new regime came into effect. 

Include the spring and there is a shortfall; start in August and there is none, because prices have risen at an annual pace of more than 2% since the autumn. 

Then again the Fed could argue that, as long as long-term inflation expectations stay around its target, it is already set for 2% on average and need not overshoot by much. 

Policymakers also disagree about how far above the target it is reasonable to go, temporarily, in the name of catching up.

Central bankers often differ over the state of the economy or the probable impact of their monetary-policy decisions. 

Failing to articulate what they are aiming for is more unusual. 

The ambiguity is contributing to uncertainty over inflation and interest rates, which has also been heightened by the novel circumstances of the pandemic and President Joe Biden’s enormous fiscal stimulus. 

A gap has opened between financial markets, which expect the Fed to raise interest rates in 2022, and the median monetary-policymaker, who does not expect rates to rise until 2024 at the earliest. 

Investors are also pricing in a growing risk that inflation will run well above the Fed’s target for quite some time.

Jerome Powell, the Fed chairman, has said that it is deliberately avoiding committing itself to a numerical rule. 

Sometimes central bankers must avoid excessive specificity, and forging consensus on a committee can be hard. 

But sooner or later the Fed must decide what it wants as inflation rises. It should do so soon. 

The monetary-policy meeting that starts on April 27th would be a good time to clear up some of the ambiguity.

China Still Needs Expansionary Economic Policy

To consolidate its post-pandemic growth momentum in 2021, China should not be in a rush to exit from expansionary fiscal and monetary policy. The government may have to issue more bonds than planned, and the People’s Bank of China may need to implement quantitative easing to facilitate this.

Yu Yongding


BEIJING – The Chinese economy grew by 6.5% in the fourth quarter of 2020, providing a strong indication that it has recovered from the COVID-19 shock. 

The market consensus is that, due to base effects, GDP growth shot up to more than 18% year on year in the first quarter of 2021, and will fall steadily in the remaining three quarters of the year before finally stabilizing.

Addressing this year’s meeting of the National People’s Congress last month, Prime Minister Li Keqiang announced that China’s growth target for 2021 is “above 6%.” 

While the economy’s growth momentum looks strong at the moment, there are signs that China may risk tightening fiscal and monetary policy too soon.

According to the Ministry of Finance, general budget revenues will increase by 8.1% this year, while general budget expenditures will grow by just 1.8%. 

It is rare for government spending to grow so much more slowly than budget revenues. 

And although the government’s planned issuance in 2021 of CN¥7.2 trillion ($1.1 trillion) in bonds is still high, it is materially smaller than the CN¥8.5 trillion it issued last year. 

At the same time, the People’s Bank of China (PBOC, the central bank) is likely to maintain its monetary policy stance, if not tighten it.

The Chinese government’s cautious attitude toward expansionary macroeconomic policy reflects its vigilance regarding inflation and financial risks – especially the latter. 

Though inflation may worsen somewhat in the near future, it is unlikely to be economically destabilizing. 

While China should pay great attention to the problem of high leverage ratios, its financial vulnerability has been exaggerated. 

It is difficult to imagine how a high-saving, high-growth economy, with huge state-owned assets at its disposal and limited foreign debt, can be brought down by a systemic financial crisis resulting from high leverage ratios.

In my view, therefore, China’s macroeconomic policy in 2021 should focus on boosting growth in line with the economy’s potential growth rate, rather than on stabilizing or lowering leverage ratios. 

Assuming that China’s potential growth rate is 6%, back-of-the-envelope calculations show that, taking the base effect into consideration, the economy should expand by more than 8% this year.

China’s growth in 2020 was driven by fixed-asset investment and exports. 

This pattern is not ideal. 

But unless the steady increase in disposable incomes resulting from strong GDP growth has convinced Chinese consumers that sunny days are here to stay, households are not likely to spend more and deplete their savings. 

In fact, household spending growth, in terms of total retail sales of social consumer goods, weakened in the first two months of 2021. 

Moreover, exports probably will contribute less to China’s GDP growth in 2021 than they did last year, owing to the global economic recovery and base effects.

Fixed-asset investment, which comprises three main categories – real estate, manufacturing, and infrastructure – has grown strongly, but its sequential growth rate has started to fall. 

Real-estate investment accounted for the bulk of fixed-asset investment growth in 2020, but this is unlikely to be repeated in 2021. 

And it is highly uncertain whether manufacturing investment can become the mainstay of investment growth.

So, to compensate for the aggregate demand shortfall, the government has no alternative but to use expansionary fiscal and monetary policy to support infrastructure investment. 

In 2020, infrastructure investment grew by just 0.9%, compared to more than 40% in 2009.

Whether a government’s budgetary plan is appropriate depends on the country’s indicative or mandatory growth target. 

To achieve annual growth of 8% in 2021, China needs a much larger increase in infrastructure investment than last year. 

Furthermore, such investment should be financed directly through government budgets rather than by bank loans to subnational authorities.

In hindsight, the central government should have issued enough bonds to fund the CN¥4 trillion stimulus package in 2008-10 rather than leaving local governments to borrow from banks to finance infrastructure investment through local government financing vehicles. 

Doing so would have avoided the financial vulnerability created by local government debts and shadow-banking activities, and also given China’s government-bond market an ideal opportunity to develop. 

In 2021, the government may need to issue more bonds than planned, and the PBOC may need to lower the interest rate to facilitate this – if necessary, by going so far as to implement a variant of quantitative easing.

Needless to say, macroeconomic policy alone will not be enough. 

The authorities should implement many more structural reforms so that all economic actors, especially local governments, have the right incentives to respond actively and reasonably to stimulus measures. 

But to consolidate its post-pandemic growth momentum in 2021, China should not be in a hurry to exit from expansionary fiscal and monetary policy.


Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.