Managing the Middle-Income Transition

Managing the Middle-Income Transition

Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.

Chapter 9: Monetary and fiscal operations: a look at the options

Yolanda Fernandez Lommen and L. Randall Wray

Subjects: asian studies, asian development, asian economics, asian politics and policy, asian social policy, development studies, asian development, development economics, economics and finance, asian economics, development economics, politics and public policy, asian politics, social policy and sociology, social policy in emerging countries


The People’s Republic of China (PRC) operates a sovereign currency, albeit in a dollar-standard world in which the vast majority of international transactions are denominated and often cleared in United States (US) dollars. This chapter explores the policy space available to the PRC as a sovereign currency issuer, and concludes that the central government has the fiscal capacity to continue pursuing economic growth at a pace consistent with its development objectives. The government can afford to spend on its development path and it has the policy space to do so even if it means incurring a fiscal deficit. Here, the PRC is in a similar position to other monetarily sovereign nations, most of which run budget deficits. Even so, excessive government spending can fuel inflation—and this chapter does not argue for greater government spending in the PRC in itself. Instead, it recommends that while total government spending in the PRC might be at the right level, the distribution between central and local government spending appears to be imbalanced. For one thing, corporations and local governments are probably issuing too much debt relative to their income flows and the central government issuing too little. If central government policy is tight, slower economic growth could put the balance sheets of domestic currency users in a potentially precarious position. If the current account surplus is reduced, or if the central government tries to move toward a balanced budget, the economic slowdown will be aggravated.

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.

Further information