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Reforms， growth and innovation were paramount at the G20 Finance Ministers and Central Bank Governors Meeting held in Chengdu， southwest China’s Sichuan Province， from July 23-24， the last such meeting before the G20 Hangzhou summit in September. A framework for structural reforms has been established， and a consensus has been reached among finance officials that more pro-growth fiscal policies should be implemented at a time when monetary policies have seen diminishing returns.
Heads of China’s central bank and finance ministry revealed China’s stance on monetary and fiscal policies during their speeches at the meeting. Zhou Xiaochuan， Governor of the People’s Bank of China（PBOC）， said that the yuan， the Chinese currency， will remain stable against a basket of currencies. Zhou also stated that the central bank is studying the possibility of issuing bonds denominated by the International Monetary Fund’s （IMF） Special Drawing Rights （SDR）， which will officially include the yuan into the basket of currencies later this year.
During his speech， China’s Finance Minister Lou Jiwei prioritized the use of fiscal policies to buttress supply-side structural reform. Lou also said China will introduce more tax policies that seek to balance innovation and social equality， with income and property tax reforms being the next task for the country.
Long-awaited framework
One of the most significant tasks accomplished by the meeting was the creation of a top-level design for structural reforms.
“Milestone achievements on pushing forward structural reforms have been made，”Lou said at a press conference after the event’s conclusion.
According to Lou， a top-level structural reform agenda has been mapped out， the first of its kind to be produced by such a meeting. The ministers and governors put forward nine areas to be prioritized， 48 guidelines， and an index system to evaluate how well the reforms have been carried out.
Lou said that although G20 members are paying increasing amounts of atten- tion to structural reforms and have made many promises in this regard， the reform process is lagging far behind people’s expectations. Lou emphasized that the key to robust and sustainable growth is to press ahead with the reforms， strengthen innovation capacity and promote social equality.
Attendees also emphasized that adequate fiscal strategies are equally important in order to realize common growth. While monetary policies have seen a decline in effectiveness， participants of the meeting concluded further pro-growth measures should be pursued. Take China as an example. The decreasing marginal effect of monetary policies has become common knowledge for industry insiders. At the end of June this year， the broad measure of money supply （M2）， which includes cash in circulation and all deposits， grew 11.8 percent year on year. Also， the narrow measure of money supply （M1）， which covers cash in circulation and demand deposits， rose 24.6 percent year on year. These figures denote that a growth rate gap between M1 and M2 has been widening with greater tendency over time.
“Judging from the widening gap， a‘liquidity trap’ is taking shape in China，”said Sheng Songcheng， Director of the Survey and Statistics Department at the PBOC， adding that the ongoing economic slowdown is caused by both insufficient effective demand and an unbalanced supply structure. He said monetary policies have a limited effect on the economy， so more should be done to coordinate fiscal and monetary policies.
According to Lou， efforts should be made from both the demand and supply sides， including implementing proactive fiscal and prudent monetary policies—especially through the use of proactive fiscal policies to support China’s structural reforms. According to Lou， the bottom line of the Chinese economy lies in the supply side， therefore the key to improving it is to press ahead with structural reforms to that sector.
SDR bonds’ potential impacts
Currency exchange rates have been more volatile than ever since the beginning of 2016， especially after the UK’s referendum on whether or not to leave the EU.
“We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments， including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will resist all forms of protectionism，”read the communiqué of the Chengdu meeting.
Since the beginning of this year， the strong dollar has also posed a remarkable amount of pressure on the yuan’s exchange rate.
“After a period of adaptation， market participants now have a deeper understanding of the yuan’s exchange rate mechanism. Currently， the yuan’s exchange rate is generally stable against a basket of currencies， and market confidence in it is fortifying. In the future， China will further improve the exchange rate mechanism， which is based on market demand and supply and adjusted in reference to a basket of currencies，” Zhou said. Li Zhenhao， a senior executive at the Development Bank of Singapore， told the Economic Information Daily that the yuan will be underpinned by the fact that global investors will hold the yuan following its official inclusion into the IMF’s SDR basket in the third quarter this year. “There won’t be sharp depreciation of the yuan，” he claimed.
Central bank governor Zhou said that the use of the SDR should be expanded and that China’s central bank is studying the possibility of issuing SDR-denominated bonds.
Zhu Jun， a senior official with the PBOC， said during the G20 meeting that an international institution is making preparations to issue the first bond denominated by the SDR and that details are in final discussions.
“Issuing SDR-denominated bonds is a financial innovation. International institutions can raise funds by issuing such bonds for transnational projects. For investors， such bonds would be quite attractive as their prices are more stable than bonds denominated by a single currency，” Li Jianjun， Assistant General Manager of the Investment & Development Department at Bank of Kunlun， told the Economic Information Daily.
Li， however， warned there’s much to take into consideration when designing such bonds， including the issuing body and what currencies investors should use to buy the bonds.
Facilitating tax reforms
Heated discussions were also held regarding the effectiveness of tax policies promoting innovation-driven and inclusive growth and supply-side structural reforms.
As was pointed out by Finance Minister Lou， tax policies should be properly used to give the market a decisive role in resource allocation. The focus of tax policies is to create an equitable environment and development opportunities for all parties as well as to promote inclusive economic growth， he said.
China is overhauling its tax system by introducing more tax policies that help innovative enterprises to grow while at the same time ensuring that those taxation tools do not widen social inequalities.
Lou said that China is building a more innovation-friendly tax regime by expanding the trial of replacing turnover tax with valueadded tax to more sectors， and introducing tax credits for companies’ research and development expenditure when collecting corporate income tax.
More efforts are being made to create a more socially equitable tax system. The most effective policy to ensure fairer income distribution is through income tax and property tax reforms， according to Lou. “Although we are faced with many challenges， these two will be the next task in China’s tax reforms，”he said.
Gao Peiyong， Director of the National Academy of Economic Strategy under the Chinese Academy of Social Sciences， said that the purpose of tax reform is to reduce indirect taxes and increase direct taxes， so as to improve China’s tax structure. “Reform on direct taxes， such as property tax and income tax， will be the biggest focus of and difficulty for China’s tax reform over the next five years，” Gao said.
Heads of China’s central bank and finance ministry revealed China’s stance on monetary and fiscal policies during their speeches at the meeting. Zhou Xiaochuan， Governor of the People’s Bank of China（PBOC）， said that the yuan， the Chinese currency， will remain stable against a basket of currencies. Zhou also stated that the central bank is studying the possibility of issuing bonds denominated by the International Monetary Fund’s （IMF） Special Drawing Rights （SDR）， which will officially include the yuan into the basket of currencies later this year.
During his speech， China’s Finance Minister Lou Jiwei prioritized the use of fiscal policies to buttress supply-side structural reform. Lou also said China will introduce more tax policies that seek to balance innovation and social equality， with income and property tax reforms being the next task for the country.
Long-awaited framework
One of the most significant tasks accomplished by the meeting was the creation of a top-level design for structural reforms.
“Milestone achievements on pushing forward structural reforms have been made，”Lou said at a press conference after the event’s conclusion.
According to Lou， a top-level structural reform agenda has been mapped out， the first of its kind to be produced by such a meeting. The ministers and governors put forward nine areas to be prioritized， 48 guidelines， and an index system to evaluate how well the reforms have been carried out.
Lou said that although G20 members are paying increasing amounts of atten- tion to structural reforms and have made many promises in this regard， the reform process is lagging far behind people’s expectations. Lou emphasized that the key to robust and sustainable growth is to press ahead with the reforms， strengthen innovation capacity and promote social equality.
Attendees also emphasized that adequate fiscal strategies are equally important in order to realize common growth. While monetary policies have seen a decline in effectiveness， participants of the meeting concluded further pro-growth measures should be pursued. Take China as an example. The decreasing marginal effect of monetary policies has become common knowledge for industry insiders. At the end of June this year， the broad measure of money supply （M2）， which includes cash in circulation and all deposits， grew 11.8 percent year on year. Also， the narrow measure of money supply （M1）， which covers cash in circulation and demand deposits， rose 24.6 percent year on year. These figures denote that a growth rate gap between M1 and M2 has been widening with greater tendency over time.
“Judging from the widening gap， a‘liquidity trap’ is taking shape in China，”said Sheng Songcheng， Director of the Survey and Statistics Department at the PBOC， adding that the ongoing economic slowdown is caused by both insufficient effective demand and an unbalanced supply structure. He said monetary policies have a limited effect on the economy， so more should be done to coordinate fiscal and monetary policies.
According to Lou， efforts should be made from both the demand and supply sides， including implementing proactive fiscal and prudent monetary policies—especially through the use of proactive fiscal policies to support China’s structural reforms. According to Lou， the bottom line of the Chinese economy lies in the supply side， therefore the key to improving it is to press ahead with structural reforms to that sector.
SDR bonds’ potential impacts
Currency exchange rates have been more volatile than ever since the beginning of 2016， especially after the UK’s referendum on whether or not to leave the EU.
“We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments， including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will resist all forms of protectionism，”read the communiqué of the Chengdu meeting.
Since the beginning of this year， the strong dollar has also posed a remarkable amount of pressure on the yuan’s exchange rate.
“After a period of adaptation， market participants now have a deeper understanding of the yuan’s exchange rate mechanism. Currently， the yuan’s exchange rate is generally stable against a basket of currencies， and market confidence in it is fortifying. In the future， China will further improve the exchange rate mechanism， which is based on market demand and supply and adjusted in reference to a basket of currencies，” Zhou said. Li Zhenhao， a senior executive at the Development Bank of Singapore， told the Economic Information Daily that the yuan will be underpinned by the fact that global investors will hold the yuan following its official inclusion into the IMF’s SDR basket in the third quarter this year. “There won’t be sharp depreciation of the yuan，” he claimed.
Central bank governor Zhou said that the use of the SDR should be expanded and that China’s central bank is studying the possibility of issuing SDR-denominated bonds.
Zhu Jun， a senior official with the PBOC， said during the G20 meeting that an international institution is making preparations to issue the first bond denominated by the SDR and that details are in final discussions.
“Issuing SDR-denominated bonds is a financial innovation. International institutions can raise funds by issuing such bonds for transnational projects. For investors， such bonds would be quite attractive as their prices are more stable than bonds denominated by a single currency，” Li Jianjun， Assistant General Manager of the Investment & Development Department at Bank of Kunlun， told the Economic Information Daily.
Li， however， warned there’s much to take into consideration when designing such bonds， including the issuing body and what currencies investors should use to buy the bonds.
Facilitating tax reforms
Heated discussions were also held regarding the effectiveness of tax policies promoting innovation-driven and inclusive growth and supply-side structural reforms.
As was pointed out by Finance Minister Lou， tax policies should be properly used to give the market a decisive role in resource allocation. The focus of tax policies is to create an equitable environment and development opportunities for all parties as well as to promote inclusive economic growth， he said.
China is overhauling its tax system by introducing more tax policies that help innovative enterprises to grow while at the same time ensuring that those taxation tools do not widen social inequalities.
Lou said that China is building a more innovation-friendly tax regime by expanding the trial of replacing turnover tax with valueadded tax to more sectors， and introducing tax credits for companies’ research and development expenditure when collecting corporate income tax.
More efforts are being made to create a more socially equitable tax system. The most effective policy to ensure fairer income distribution is through income tax and property tax reforms， according to Lou. “Although we are faced with many challenges， these two will be the next task in China’s tax reforms，”he said.
Gao Peiyong， Director of the National Academy of Economic Strategy under the Chinese Academy of Social Sciences， said that the purpose of tax reform is to reduce indirect taxes and increase direct taxes， so as to improve China’s tax structure. “Reform on direct taxes， such as property tax and income tax， will be the biggest focus of and difficulty for China’s tax reform over the next five years，” Gao said.