[Lau Ka-kuen/South China Morning Post]

HUANG YIPING is dean of the National School of Development at Peking University and sits on the Monetary Policy committee of the People's Bank of China and the Hong Kong stock exchange's Mainland China Advisory Group. Previously, Huang was a senior economist with Barclays and Citigroup in Hong Kong. As part of our OPEN QUESTIONS series on interviews with global thought leaders, Huang tells FRANK CHEN about trade prospects during a second Donald Trump administration in the United States and the details of his idea for a 'Chinese Marshall Plan'.

On Friday, China's top legislative body announced an additional 6 trillion yuan (HK$6.3 trillion) in hidden debt relief for local authorities, with more support pledged for next year. How helpful is this? With Donald Trump set to return to power, should Beijing roll out more stimulus?

The debt swap plan can take some immediate pressure off a lot of local governments, and thus lessen their "contraction effects" when it comes to putting Beijing's stimulus into place.

The "contraction effects" stem from the fact that many financially strapped localities cannot effectively implement pro-growth measures, and their inability to do more due to tight finances is diluting Beijing's growth push.

My advice is the central government raise its deficit ratio, to bear more debts in next year's budget and expand the incomes of local authorities.

Donald Trump is very likely to further hike tariffs to target China. Beijing should take precautions by rolling out more measures to stabilise and spur domestic demand.

China should also keep up ties with other countries and regions to safeguard an open, multilateral world trade system and help other countries start their green transition.

How would you assess the effect of the stimulus measures rolled out since the end of September? Is China now on track to attain this year's gross domestic product growth goal of "around 5 per cent"? What about 2025 and beyond?

Beijing has made a U-turn in its macroeconomic policy stance since the end of September. This was triggered by the fading possibility of attaining this year's GDP target, as the economy underperformed in the second quarter and third-quarter growth has failed to pick up steam.

With new monetary easing and fiscal policy support, Beijing has made it clearer than ever that stabilising growth is the top priority. Still, it remains to be seen if we can orchestrate a fierce rebound in the final quarter to hit the goal.

But I would say a noticeable upturn in 2025 will be very likely as macroeconomic policies pay off.

Is there an even bigger stimulus in the making? Do you think this policy pivot is a tactical move or a strategic and structural one?

It's difficult to predict if more stimulus is in the pipeline, but the top leadership has demonstrated resolve to turn the economy around. Monetary and fiscal policy support will be further cranked up if a turnaround is not there in the next few months.

It also remains to be seen if the pivot is a tactical or a strategic move.
The strategic shift is obvious on the macroeconomic front, but we need more time to see if there will be more structural reform.

Top policymakers should be recognised for the steps being taken, especially in reassuring and revitalising the private sector. There was a 31-point policy package in 2023 in this regard, and the third plenum in July reiterated the importance of fair competition and fair market access. Now a dedicated law is being crafted to promote the private economy. But for now, most entrepreneurs are waiting to see concrete evidence of enforcement of these policies.

Before the latest round of stimulus, you said local governments could no longer swiftly carry out Beijing's pro-growth measures. Why is that, and how can it be resolved? After the recent announcements, have you seen a change in mindset?

In previous crises - the Asian financial crisis in 1997 and the global financial tsunami in 2007 and 2008 - the central authorities' policies were swiftly implemented by local governments.

This time around, local governments in China are worse off. They no longer have the financial resources, as land sales slump and their financing vehicles are scrutinised. Some localities cannot even pay their staff after three years of the Covid pandemic draining public finances. It is not that local governments do not want to rekindle growth; their resources have been stretched thin, in some cases close to the breaking point.

The takeaway is that when it's hard for localities to get growth back on track, central authorities perhaps should assume more responsibility in policy implementation. Macroeconomic policies, in fact, fall into the purview of the central government.

By "more responsibility", I mean concrete fiscal expenditures by the central government to reignite the economy, not just slogans. The boost has to be big enough to give the economy a real jolt and the push has to be from the top, not from anyone else, as cash-strapped localities are unable to do much to help.

Local authorities in China used to act as a "magnifier" of Beijing's macroeconomic policies, but now they are diluting or tapering the effect of Beijing's pro-growth policies due to their worsening finances.

There are two layers to this issue. First, local governments are cutting expenditures, which in turn will reduce aggregate demand. Second, some resort to arbitrary fines and tax checks to grow their income, even dispatching law enforcement beyond their own jurisdictions to collect fines or seize assets from enterprises, usually private ones. This is a big blow to business confidence.

When the central government draws up next year's budget, it can first make arrangements to guarantee the basic fiscal needs of local governments. Then it can review the distribution of fiscal resources between central and local governments to expand sustainable income for localities. Beijing also has to get tough on illegal fines and tax checks that target private entrepreneurs.

But will the move to curb local governments' powers leave people with the impression that this is a step backward, given local governments are perceived to be closer to the market?

We need to clearly explain the rationale. The consideration is to better match fiscal resources with spending responsibilities and tackle the debt issue in many localities.

In the past, the popular thinking was that local governments could borrow money and the central authorities would bail them out if there was trouble. This has to change.

Also, with the central authorities assuming more duties, more fiscal resources should be transferred to local levels in the clampdown on local debts. A balance between central and local governments also has to be achieved.

In addition to redistributing powers and resources among different levels of the government, the overall policy direction should ensure that the market plays a decisive role in the allocation of resources. Both central and local governments should hand some powers over to the market. Local officials should keep their noses out of developing a specific industry, as their interference usually distorts the market. The government as a whole should step back and leave market players to their own devices.

You have proposed a Global South Green Development Programme, which could be considered China's Marshall Plan. Can you elaborate on this?

I first proposed this programme at a symposium in May.

This came at a time when we faced many challenges. For example, we need to deal with the international controversies surrounding the size of China's new energy sector. When US Treasury Secretary Janet Yellen visited Peking University's National School of Development in April, she again raised the issue of Chinese government subsidies, the scale of China's electric vehicle (EV) exports and its impact on American industries and jobs.

The challenge we are grappling with today is that the domestic market alone may not be big enough to accommodate EV and green product output. What's more, the West is putting up roadblocks like tariffs. So where should we go?

Then there is also the question of China's snowballing trade surplus, which has accumulated for years. This is having international repercussions, given the weight of the Chinese economy today. Historically, countries running huge trade surpluses could end up trapped in serious economic, political or even military conflicts.

We need to reflect on this and find ways to grow and prosper with our trading partners, which is a big challenge going forward.

Then I thought of the US Marshall Plan in 1948, when Washington set aside US$13 billion - 5 per cent of its gross domestic product at the time - to fund the economic revival of Europe in the aftermath of World War II.

The plan paid off well for America, which benefited tremendously from Europe's revival as the US economy grew alongside a transatlantic alliance which sided with Washington in its Cold War with the Soviet Union.

The US got far more than US$13 billion in return. I think China can do something similar. The bottom line is, with a huge green product output and the US and Europe closing ranks to squeeze our products out, we can tap the robust green transition demand from the much vaster developing world.

These developing countries need a green transition too, but technologies, products and capital are lacking. With their demand and our excess output, I think perhaps we can put in place an initiative to serve both sides. That was how the Global South Green Development Programme was conceived.

As numerous developing countries embark on their green transition, China has so much to offer - commercial loans and investments, funding from Chinese policy banks, direct government aid. This will put China on an unassailable moral high ground. The green transition is a universal need, but not all countries have the financial capability and know-how for it. In doing so, we also gain incremental demand.

This can also foster mutually beneficial development between China and the Global South, including countries in the Belt and Road Initiative. It can be a big win for all. Interestingly, Brian Deese, former director of the National Economic Council in the Biden White House, wrote in Foreign Affairs magazine in September that the US should lead the global green transition and reap the benefits.

So there are interesting similarities. The Global South Green Development Programme can relieve China's overcapacity pressure and make the developing world greener - and in the long run, forge a closely knit strategic nexus of co-development.

Certainly we cannot rule out the likelihood of pushback from major developing countries, especially when they may also be nurturing their own green and new energy industries. That is why we must uphold a mutually beneficial and reciprocal approach for co-development.

This programme was never intended to flood the world with Chinese goods to crush foreign competitors and jobs. China is happy to help if any country pursues green development. Not all countries have the resources and tech to decarbonise and transition their economy, but green development is a universal demand. This is where China, with its wealth of expertise, can fit in.

You have warned that household and corporate balance sheets are under unprecedented pressure. How close is China to deflation and a balance sheet recession?

Balance sheets have been under pressure since the Covid outbreak, when households, businesses and local governments saw their finances deteriorate.

The property sector slump has exacerbated these woes. We must face this issue. Receding balance sheets will also dampen aggregate demand. The macroeconomic impact can be profound, and that is why we may need an aggressive policy response.

Weak demand will put pressure on prices and overall economic recovery. My advice is that macroeconomic policymaking should accord the same importance to achieving modest inflation as economic growth.

The stagnant consumer price index changes are cause for concern. When prices are not rising, there can be a vicious cycle as consumers stop spending in anticipation of further price drops.

This was exactly what happened in Japan, a country embroiled in a vicious cycle where a poor outlook from consumers, producers and investors fed off each other. To break this downward spiral we need forceful policies.

Under the current circumstances, perhaps we can set and achieve a stronger inflation target, like 2-3 per cent annual growth in the consumer price index. Different times require different priorities, and it makes a lot of sense to elevate the inflation target as an imperative when downward pressure is still mounting.

The People's Bank of China, the country's central bank, has started making bond purchases. Many believe it is equivalent to quantitative easing (QE), an argument Chinese authorities have vigorously denied. What is your opinion?

Central banks' purchase of treasury bonds is a liquidity management tool, which is quite common across the US and Europe. By comparison, China's monetary policies traditionally manage liquidity via reserve requirement ratio (RRR) adjustments. Raising RRR can help drain liquidity from the market back to the central bank, and vice versa.

But RRR, across most market economies, is only used to fend off liquidity risks for commercial banks as a precaution against bank runs.

Now, bond purchases can be the next tool readily available for the Chinese central bank to manage liquidity, as most other central banks have done.

When the PBOC buys bonds, it injects liquidity into the market and when it sells bonds, it can pull money from the market. It's purely a liquidity management tool. Those who think this is equivalent to QE need to take into account the quantity of such trading. The determining factor is if you have lifted the floodgate for infinite liquidity.

QE in the past was done via the purchase of medium- to long-term bonds to suppress their interest rates. One factor distinguishing the PBOCs bond purchase from QE is the intention: it is narrowly tailored to address the need to manage liquidity, no different from the PBOC's other open-market operations. It is not a Chinese version of QE as some may argue. There is no such intention, at least for now.

You began advising the PBOC in 2015, amid a market rout and devaluation pressures on the yuan. You became a monetary policy committee member again in March. How has the bank changed over the last nine years? What can be learned from the US Federal Reserve in building a modern central bank system?

A strong central bank is a key pillar to Beijing's vision of becoming a financial superpower. A strong central bank has two overarching duties: monetary policy and macroprudential supervision.

Monetary policies, in a nutshell, are designed to keep the yuan stable to support economic growth. There are two layers: internally, to keep prices stable, and externally, to keep the yuan's exchange rate stable. The PBOC's monetary policy parameters are not that different from its peers in market-economy countries.

Macroprudential oversight, the other part of the PBOC's two-pronged policy framework, is all about keeping the financial system stable. A strong central bank is defined by how well these two tasks are accomplished.

Macroprudential oversight was thought indispensable in the aftermath of the subprime mortgage crisis in 2007 and 08, as central banks around the world realised in hindsight that micro-level supervision was inadequate to stave off threats to macro, system-wide stability.

The Chinese central bank looked at what it could learn from the US Fed after the crisis. When Alan Greenspan was at the helm, he mostly pursued price stability, in particular CPI. He did a fairly good job in this domain. But financial risks spiked soon after his retirement in 2006. The criticism was that the excessively loose monetary policies under his watch triggered huge risks.

Therefore the question is, can monetary policies guarantee financial system stability?

One policy tool cannot serve two policy goals. Monetary policies will need to respond once asset prices become frothy but more critically, macroeconomic stability is the overarching requirement. This is when macroprudential management takes centre stage. This is a big shift in the PBOC's focus and priorities.

The PBOC's policy framework has evolved a lot since 2015, most notably in the introduction of macroprudential management.

China's monetary policies have also evolved to be more aligned with the market. In the past, we used to have a state-led comprehensive credit plan that assigned specific loan quotas to each bank to determine credit supply for every industry.

The market-oriented transition of monetary policies has two hallmarks: first, administrative control over credit supply gives way to liquidity and interest rate adjustments, and second, focus shifts from quantity metrics like M2 and credit supply to price changes. Market price tools and indirect, more nuanced management have become more important.

We should admit, though, that there are still some discrepancies between the design and reality.

One example is the monetary policy transmission mechanism. China's financial system is still immature. In the US and Europe, the markets react almost simultaneously once central banks adjust policy rates. There is smooth policy transmission. But in China, rate adjustments may not yield immediate, noticeable results.

Some state-owned enterprises may not be very sensitive to policy rate changes, even though they bear loans. So the Chinese central bank may still need to resort to quantitative tools or even informal policy instruments like window guidance to get things done.

These expedient wavs may not appear to be market-oriented, but they fit the reality of the Chinese economy which is still in transition. It may not be realistic for the PBOC to only manage overnight rates. But this must be the long-term direction and objective - and market mechanisms must be put in place and strengthened.

PBOC governor Pan Gongsheng has explained the bank must take charge of both short and medium rates - the seven-day reverse repurchase rate and medium lending facility (MLF) rates - simply because policy transmission is not smooth.

Pan has indicated a goal of phasing out MIF rates, marking a step forward for our monetary policies to be more market-oriented.

What should China's central bank do to shore up the economy, which has lost some momentum?

There are discussions about how strong supportive policies can and should be. My take is that monetary policy alone is not sufficient to shore up the economy, and that fiscal policy has a stronger role to play and fiscal support can be boosted further. Many banks have ample liquidity but lack credit demand. The effect of interest rate cuts will also be diluted by inadequate credit demand. Fiscal policies are paramount to shoring up the economy.

There will always be room for improvement in the collaboration between the central bank and finance ministry, as all regulators are expected to spare no effort to help the economy. But it may need more coordination from the top leadership.

In this year's commencement speech at Peking University, you warned that finance graduates would be less likely to get jobs that can earn 1 million yuan a year. Given China's current financial reshuffle, are you worried the country's best and brightest will flow to other sectors?

It may not be a phenomenon unique to China. Elsewhere in the world, financial sector pay has cycles.

We saw this after the Great Depression in the US around 1930 and following the subprime mortgage crisis in 2007 and 2008. Here in China, though we have not had a financial crisis of any comparable magnitude, there are intensifying risks and people are worried. This is the backdrop of the stricter supervision and deep pay cut.

For jobseekers the lure is understandably diminishing as the return is not as high as it used to be. But we need to take a long-term view that the criticality of finance must not be understated.

China's economic growth is transitioning to be innovation-driven. Nowadays, there is another rush to pursue tech-related degrees in computer science and in artificial intelligence, but will there be a surplus of talent in this area one day? Is there a reasonable allocation of talent and resources?

Financial innovation must go hand in hand with tech innovation to drive future growth. British economist and Nobel laureate John Richard Hicks once said that the industrial revolution had to wait for the financial revolution.

Tighter regulation and pay cuts won't spell the end of the financial sector. The top leadership's "financial superpower" comments say it all. Building an economic and technological superpower is contingent on financial superpower status.

With the yuan's full convertibility not possible in the foreseeable future, how should China turn itself into a "financial superpower" and accelerate the internationalisation of the yuan?

China can still do quite a lot to build itself into a financial superpower even when the yuan is not yet fully convertible. The Global South Green Development Programme, for instance, will require use of the yuan in Chinese financial services, commercial loans, market-oriented investment, policy funding and direct aid. Yuan tools and digital yuan solutions can have a lot of applications overseas.

In the meantime we can continue to explore opening up some capital accounts in a contained and steady manner so as to keep risk at bay, starting with those accounts that have little or limited impact on financial stability and security.

The top leadership has said long-term capital from abroad is welcome to set up shop in China. This won't increase China's financial risks. Opening up China's financial sector should continue to be pursued.

Second, we need to grow offshore yuan markets to compensate for the lack of full convertibility. A currency cannot become international if there are barely any foreigners or foreign entities using or holding it. Sizeable offshore yuan pools in Hong Kong, Singapore or London - though largely and normally not entirely dependent on the onshore market - can still help.

But these are not nearly enough. If we can expand the breadth and depth of Hong Kong's offshore yuan pool so any foreign individual or entity wishing to trade and hold the yuan can go to Hong Kong, the yuan will become more influential and international even when we continue to keep tabs on capital accounts.

What is Hong Kong's role in China's future plans? How can Hong Kong's status as an international financial centre be safeguarded?

A strong international financial centre is another key pillar of Beijing's vision of becoming a financial superpower. China already has one. The issue is keeping and consolidating its international stature.

Shanghai is a domestic financial centre serving domestic needs. It has some overseas deals, but their significance is limited for now. Today, this is a role for Hong Kong and Hong Kong only.

Hong Kong has taken some hits in recent years, with spillover and collateral damage from US-China tensions. But all the elements that make Hong Kong an international financial centre are still intact: sound jurisprudence and legal system as well as regulatory framework and market mechanisms that are widely recognised by the international market.

The issue boils down to whether we can retain all of these. If we can continue to run Hong Kong well and keep and entrench its role, China will become a stronger financial superpower.

There has been a lot of discussion about the sustainability and necessity of the Hong Kong dollar's peg to the US dollar. This is still the best arrangement in today's circumstances. Although the Hong Kong economy has become more integrated with the mainland, it is still unrealistic to peg the Hong Kong dollar to the yuan when the latter is not fully convertible. Nor is it realistic for the Hong Kong dollar to have fully floating rates. The peg makes a lot of sense, given the dominance of the US dollar.

Hong Kong can never be immune from the squeeze of geopolitics. Whether the city will face more headwinds is determined by the dynamics of US-China relations. The city, being part of China, can offer significant support to the mainland's economy. The US is aware of this, so it may want to apply more pressure. This may be unavoidable.

What can be done is that the central authorities and Hong Kong government can make joint efforts to preserve and promote "one country, two systems". The city is a Chinese territory, but it is also where market forces dominate, where its institutions and its way of life are in line with international standards with international recognition. We must continue to keep all of these in place. In doing so, the city can continue to serve as a bridge between the world and the broader Chinese economy.

Some American and European investments have been pulled out of the city amid heightened geopolitical and national security risks. But I also heard from many investors that if Hong Kong can continue to function as a global financial hub, financial assets in the city will continue to be sought after by man institutions

Suppression [from the US] may be unavoidable, but this is not and should never be the end of the city.

There are many other countries out there with which we can seek to enhance ties. Even with Europe, we have more flexibility. There are also opportunities in the Middle East and elsewhere. Hong Kong has a role to play in China's new strategies, in terms of funding, investment and technological cooperation.