اثر Stagflationary تامین مالی اوراق قرضه دولتی در دوره انتقال اقتصاد چین: تجزیه و تحلیل تعادل عمومی

This paper studies how the method of government debt financing affects the macroeconomic performance of the transforming Chinese economy. The investigation is conducted within the context of an endogenous growth model that incorporates the major institutional features of the Chinese economy. Using this framework, we evaluate the effects on the growth rate of output and inflation if the Chinese government relies more on bonds and less on money creation for budget deficit and debt repayment financing. It is shown that although this policy change can reduce the growth rate of the money supply, it can generate a stagflationary effect: reducing the rate of output growth while raising the rate of inflation, if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and the tax rate on labor income is sufficiently low.

In 1993, only 1 year after Deng pushed the on-going economic reform further by visiting South China, the Chinese economy appeared to overheat considerably. Investment projects were undertaken everywhere in the country, especially in the coastal regions; the general price level rose rapidly, indicating an excessive aggregate demand. To cool off the economy, the Chinese government initiated an economic “soft-landing” at the end of June 1993. In addition to raising interest rates on government bonds and bank deposits, the government made a serious attempt to reduce the growth rate of the money supply by tightening bank credit. To lower inflationary expectations, certain measures of price control were imposed. Moreover, the government increased the quantity of bonds issued to the public to soak up liquidity (the value of outstanding state bond increased from 4.8% of GNP in 1992 to 5.7% in 1995).1 Surprisingly, the measures undertaken to cool off the economy generated a period of stagflation. On the one hand, the growth rate of GDP declined (14.1% in 1992, 13.1% in 1993, 12.6% in 1994, and 9.0% in 1995), on the other, inflation accelerated (5.4% in 1992, 13.2% in 1993, 21.7% in 1994, and 14.8% in 1995) and did not drop to 6.1% until 1996. By identifying the exchange rate policy adopted during the period of 1993–1994 as a major destabilizing factor, Naughton (1995) offers a reason why the inflation rate in China did not drop for 2 years. In January 1994, China devalued its currency at a rate around 8.7 yuan to the dollar. Exports increased in response to the devaluation and the trade balance swung from a deficit of US$12.2 billion to a surplus of US$5.35 billion. This increase in the trade surplus resulted in a huge inflow of foreign currency and the Chinese central bank opted to purchase foreign currency earned by exporters. As a result, the government injected about 250 billion yuan into the domestic economy. To our knowledge, there is no explanation given as to why stagflation took place in China during that period. The objective of this paper is to provide a possible explanation. We do so by studying how the method of government debt financing affects the macroeconomic performance of the transforming Chinese economy. In particular, we investigate the effects on the growth rate of output and inflation if the Chinese government relies more on issuing bonds and less on printing money for budget deficit and debt repayment financing. As is commonly agreed, the overheating of China's economy was mainly due to monetization of government deficit, which is caused by the combination of the decline in government fiscal revenue and the lack of a mechanism that imposes effective financial control over the state sector. In the process of reforms, as marketization deepened, many state-owned enterprises began to suffer heavy losses and could no longer generate as much revenue for the state as they did in the years before 1978. Moreover, without an effective internal revenue system, the government had a great difficulty in collecting taxes from the newly developed non-state sector. Consequently, there was a sharp decline in the consolidated government budget revenue, falling from over 34% of GNP in 1978 to just above 10% in the early 1990s. On the other hand, the overall investment level in the state sector remained high and even exhibited an increasing trend in 1990s (see Naughton, 1995). With the monopolization of the financial sector,2the state relied heavily on the state-controlled banking system directly and indirectly to raise funds so as to substitute for its declining direct budgetary revenues.3 Both local governments and the central government compelled the banking system to provide credit for their priority investment projects. Further, the government allowed the loss-making state-owned enterprises to borrow from the state-controlled banking system. This perverse flow of bank credits constituted monetizing the government expenditure and thus, was the major cause for the loss of control over the money supply, which in turn led to the rapid increase in the general price level. The presence of a large government deficit is a common problem in many economies burdened with either social welfare programs or producer subsidization schemes, or both. Usually, there are two ways to finance the government deficit: printing money and/or issuing bonds. Financing deficit through money creation constitutes taxing the money holders through inflation; and bond financing is to shift the fiscal burden from the current generation to the future generations. Conventional wisdom suggests that financing budget deficit by money creation will generate high inflation and thus social instability.4 It is for this reason that governments in the developed market economies mainly rely on issuing government bonds instead of printing more money to finance their deficits.5 The relevant question here is: if the Chinese government uses more bonds and thus less money creation to finance its deficit, will this measure necessarily lower the rate of inflation given that inflation is already a severe problem in the economy? To provide a pertinent answer to the question posed, we follow the methodology adopted by Byrd (1989), Bennett and Dixon, 1995 and Bennett and Dixon, 1996, Brandt and Zhu (1995), to build a macrotheoretic model based on the existing analytical framework in such a way that it sufficiently characterizes the partially reformed structure observed in the Chinese economy.6 Using the framework, we show that if the Chinese government uses more bonds to finance its deficit, it may generate a stagflationary effect. Specifically, if the initial fraction of government deficit and debt repayment financed by bonds is sufficiently small and if the tax rate on labor income is sufficiently low,7 an increase in the fraction of government budget deficit and debt repayment financed by government bonds will decrease the growth rate of output and increase the inflation rate. As such, our analysis does provide a possible explanation for the stagflationary phenomenon experienced in China during the 1993–1996 period. The rest of the paper is organized as follows. The institutional features of the Chinese economy is summarized in Section 2. In Section 3, the model is specified. Section 4characterizes the agents' optimization problems, the general equilibrium, and the balanced growth path of the model economy. Section 5provides the major results and intuitions. Some concluding remarks are offered in Section 6. The derivations of our analytical results are in Appendix A.

Chinese economic reforms have achieved a remarkable success. In the past 19 years, while undergoing a fundamental transformation, China's GNP grew at an average annual rate close to 10%; and, as casual observation suggests, the living standard of ordinary people improved considerably.29 However, the reform process has not been a smooth one. Rapid economic growth was accompanied by several cyclical fluctuations. At times, the burst of double-digit inflation forced the Chinese government to slow down the pace of reforms.30 How to maintain macroeconomic stability while retaining the impressive growth performance so as to push the reforms further has become the principal concern for the Chinese government. Given the sheer size of the Chinese economy and its perceived potential, this issue has naturally attracted wide attention from economists in the west. Discussions have been generated and policy evaluations offered (McKinnon, 1991a and McKinnon, 1991b; Naughton, 1991 and Naughton, 1995; Yusuf, 1994; Brandt and Zhu, 1995). In this paper, we investigate the effect on the rate of output growth and inflation if the Chinese government uses more bonds and thus less money creation to finance its budget deficit and debt repayment so as to control inflation. It is shown that although financing government debt through more bonds can reduce the growth rate of the money supply, it may generate a stagflationary effect: reducing the rate of output growth while raising the rate of inflation. As such, our result provides a possible explanation for the stagflationary phenomenon experienced in China during the 1993–1995 period. Clearly, the derivation of the possible explanation depends critically on our model specification, which reflects the channels of influence we want to highlight. The Chinese economy differs from the advanced market economies in two significant ways. First, it has a dual structure consisting of the state and non-state sectors. Because it is state-owned, the state sector enjoys the advantage of being subsidized for its inefficient investment and production. Second, by maintaining tight control over the financial sector, the government plays a key role in the allocation of financial resources in the economy, regulating interest rates on the financial assets, setting the quantity of bonds available to the public, and determining the allocation of bank loans. Because of the incorporation of the first feature, the government deficit is endogenously determined in our model. As a result, a change in the method of government debt financing may enlarge or reduce the ratio of government fiscal burden to the output level of the economy. Since the productivity levels of these two sectors are different, a change in the financing method will lead to a resource reallocation between the private sector and the state sector and thus, exert real effects on the economy. Moreover, given that in the standard model the rates of return on financial assets and capital investment are determined by market forces, changes in the supplies of money and bonds will affect the market rates of return on different assets and generate portfolio substitution effects. However, in our model, due to government monopolization, interest rates on government bonds, bank deposits, and bank loans are regulated by the government. Thus, the adjustment of individuals' portfolios is not induced by changes in interest rates, instead, it is because of quantity rationing. Consequently, in our model, changes in the method of government debt financing will affect the macroeconomic performance in a different manner than that in the standard model.