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Lessons for China from the Crisis in Euroland

Xinhua Liu and L. Randall Wray

Chinese Economy, 2012, vol. 45, issue 6, 6-25

Abstract: Most countries have suffered from the global financial crisis. Some eurozone countries—the so-called PIIGS—are now facing debt crises that could conceivably threaten the entire euro project, a situation that has spurred the Chinese government to worry about its high governmental deficit, inflation, and a speculative boom in real estate and equities—problems that could spill over to financial institutions. This article adopts the chartalist approach in arguing that China, as a monetarily sovereign economy, does not have the same problem as the eurozone countries, despite heavy debts from state-owned enterprises. China can solve its huge foreign reserves problem by floating its exchange rate with some capital flow constraints, but the proposed supranational monetary regime is neither desirable nor politically feasible. This does not mean that excessive nonsovereign debt or speculative bubbles are not problems. However, the biggest problems facing China are uneven development, high underemployment, mostly low-income jobs available in much of the country, tight labor markets, and modern development in the major cities. China needs to focus on developing domestic demand.

Date: 2012
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Handle: RePEc:mes:chinec:v:45:y:2012:i:6:p:6-25