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China’s New Path

CAMBRIDGE – The opaque nature of China’s government makes it difficult to see where Chinese economic policy is heading, and thus how the Chinese economy will develop in the years ahead. But the scale of China’s economy and its role in global trade and financial markets compel us to try to understand the intentions of China’s new leadership.

A useful starting point is to examine the key appointments that have been made since President Xi Jinping assumed office. One surprise was the decision to retain Zhou Xiaochuan as Governor of the People’s Bank of China (PBOC). Zhou had come to the end of his term – and had reached an age at which officials are supposed to retire. So the decision to keep him on for at least the next two years represents a significant endorsement by the new Chinese leadership.

Zhou is an intelligent and internationally respected expert on monetary policy and finance. As the head of the PBOC, he has favored more market-based monetary policies and increased internationalization of China’s currency, the renminbi. He has also worked successfully to contain inflationary pressures. We can expect more of the same in the coming years.

The new finance minister, Lou Jiwei, comes to the ministry from the China Investment Corporation, China’s sovereign wealth fund, where he dealt with global capital markets on a daily basis. Lou, a trained economist who previously served in the Ministry of Finance as a deputy minister, where he was a voice for pro-market reforms, indicated his current approach to tax and budget policy at a recent meeting in Beijing. He rejected what he described as the European style of very large government and high tax rates and the American style of lower tax rates but large fiscal deficits, in favor of low budget deficits and a tax system that would promote “opportunities” for individuals and private enterprises.