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China’s Crypto Market: Digital Yuan as an Alternative to Private Cryptocurrencies



In May–June 2021, China—allegedly to preserve financial stability—banned mining of bitcoin and other crypto assets in such major mining centers as Inner Mongolia, Sichuan, Xinjiang and Yunnan. The total ban on mining was far from unexpected for miners as the Chinese authorities had repeatedly issued warnings over the risks of bitcoin mining since 2013. There are at least three reasons for the intervention of regulators in crypto mining in China. First, they need to combat speculation. Second, to eliminate competition with the digital currency of the People’s Bank of China. Third, to prevent environmental and other damage to society. We shall turn to each of these aspects in greater detail.

Speculative craze

China has never experienced any major financial crises causing damage on a scale comparable to other leading global economies. The country’s relatively stable economic development can be explained by China’s financial sector never having been particularly innovative. Paper money, China’s unique 9th century invention, was used mostly to service trade along the Silk Road; unlike in the West, paper money in China did not serve to accelerate the advance of capitalism. The fractional reserve system—the basis of contemporary banking—spread from Britain to other nations in the 19th century, bypassing China until the last quarter of the 20th century.

It should be emphasized that China abandoned paper money back in the 15th century, when Mongolian enslavement triggered raging inflation. From then on, copper money became entrenched in China’s monetary circulation. True, silver was used for big transactions (circulating in the form of ingots rather than coins), but it played a limited role on the domestic market. Chinese money had, therefore, nothing in common with the European monetary system of minted silver and gold coins, a coinage that would often debase. Despite its eccentricity, China’s bimetallic copper-silver standard was enviably stable, largely due to the efforts on the part of the state in maintaining the balance between copper and silver as the government would issue silver from the Imperial Treasury every now and then.

Following its victory in the First Opium War, Britain launched China’s financial sector. In the West, the exchange emerged as a financial institution back in 1409 in Bruges, while China’s first exchange based in Shanghai was not established until 1904. Even so, it was founded by Anglo-American and French exchange traders who were using it to trade in foreign securities—China’s first stock companies did not appear until the 1980s. During World War II, the Shanghai Exchange was closed to resume trading only in the early 1990s.

At the same time, China’s catch-up mode of development has caused Shanghai’s constant improvement to offer the city a progressively greater role as a multi-purpose financial center. Today, a broad range of innovative products circulate on its financial markets, including crude oil futures, two-year treasury futures, cellulose futures, interest rate options, stock options, copper options, plant rubber options and equity index options. Shanghai has become Asia’s top and the globe’s third largest crude oil options market. Chinese stocks and shares are listed on such leading exchanges as MSCI, the FTSE and S&P Dow Jones, with Chinese bonds also listed in the Bloomberg Barkley Global Aggregate Index and the J.P. Morgan Emerging Market Bond Index. Shanghai’s stock market enjoys the world’s fourth-biggest market capitalization and trade volume. By the end of 2019, the custody balance of Shanghai’s interbank bond market had reached RMB 86.4tn, accounting for 87% of China’s bond market balance and ranking second in the world.

In the coronavirus year of 2020, China was ahead of the U.S. in terms of the number companies enlisted in the influential Fortune Global 500. The same year, M&A transactions involving Greater China grew by 30% to over USD 700bn.

China’s aggressive approach to capital concentration and purchasing strategic foreign assets is ensuring that China reach its objective in cutting-edge technologies. China’s activity on the cryptocurrency market can be seen as part of this strategy.

Overall, China accounts for some 65% of the bitcoin mined worldwide. China’s leadership comes from its cheap labor force, availability of electricity, and a relatively cheap local production of computer chips and other equipment required for mining farms. According to The Economist, the mining ban resulted in about 90% of cryptocurrency mining in China being suspended. Major miners moved their business abroad, primarily to the U.S., Kazakhstan and Russia, the next three bitcoin-mining leaders. The financial risks, to which Chinese regulators responded, stemmed from the threat of rising inflation triggered by exchange of appreciated bitcoin for yuan rather than from the mining itself.

Experimenting with the digital yuan

Back in September 2017, China declared cryptocurrency ICOs illegal since these are not legal tender. It was then when China began preparations to shut down platforms trading in cryptocurrencies and to remove mobile phone apps from the relevant sites. At the same time, however, China might be planning to achieve global leadership in the fintech industry. China’s biggest companies have launched hundreds of pilot projects using blockchain technologies. Most of these are directly connected with China’s ambition to launch the world’s first full-fledged digital currency.

In April 2020, the People’s Bank of China permitted testing of hypothetical use of the digital yuan in several regions around Beijing: the Xiong’an New Area, Shenzhen, Suzhou, Chengdu as well as at the 2022 Winter Olympics venues.

Additionally, China’s proactive plans for launching the world’s first digital currency can be explained by the Chinese authorities willing to make up for the marginal use of the yuan in international finance. Clearly, the share of the Chinese yuan in various sectors of the global financial market—the foreign exchange market, the lending market, the stock market, the investment market—is significantly below China’s status as the world’s largest manufacturer and exporter. Additionally, China’s money supply in dollar equivalent is 40% greater than that of the U.S. (M2SL is measured). Should all restrictions be lifted from the capital account while the world’s biggest economy remains without a key currency, China’s economy will be fraught with the danger of becoming dollarized.

When the yuan was included in the SDR valuation basket (the IMF’s non-cash reserve asset), its share in international currency reserves had risen to a mere 2.3% by the end of 2020. By comparison, the euro’s share is 21.2% while the dollar’s share is 59%. The yuan’s share of the international deposit and loan markets and debt holdings is even smaller, averaging around 1%. According to SWIFT, the dollar and the euro accounted for 40% each in international payments in May 2021, while the yuan only accounted for 1.3%.

New technologies could potentially change the current configuration of the key currencies. Development of innovative financial and payment systems could reduce both transaction costs and the impact of the current network effects and inertia. Technologies could also help avoid sanctions and capital movement control by encouraging alternative currencies. Short-term digital currencies and payment ecosystems are the two most efficient agents of change. Digital currency competition may differ from traditional currency competition in differentiating along associated networks and users rather than being based on macroeconomic performance, which may possibly alter the traditional drivers of reserve currency configurations.

Presumably, the Chinese vision of a sovereign digital currency— the so-called digital currency e-payments (DCEP)—will be used to model everyday banking activities, including payments, deposits and digital wallet withdrawals.

Once the digital yuan is launched, its users will be able to download an e-wallet app approved by the People’s Bank of China and link it to a bank card to make payments as well as use their cell phone to get digital yuan from sellers or transfer money using ATMs and other users.

Spiking carbon footprint

China signed the Paris Climate Accords, undertaking to completely eliminate CO2 emissions by 2060. Currently, however, China is still the world’s No. 1 environmental polluter—largely, because of the excessive use of electricity for bitcoin mining.

Cryptocurrency mining has triggered rising demand for coal, prompting some producers to restart idle mines without official approval and entailing higher safety risks and a jump in fatal accidents. According to some estimates, each USD 1 of Bitcoin value created in 2018 was responsible for the damage to health and climate of USD 0.37 in China and USD 0.49 in the U.S.

Yet, environmental problems are not the only threat produced by crypto asset circulation. In its Annual Economic Report, the Bank for International Settlements (BIS) [1] stresses that cryptocurrencies are essentially speculative assets often used for money-laundering and mounting ransomware attacks; their circulation involves wasteful energy expenditure that is not in the best public interests.

In June, China’s police arrested more than 1,100 people suspected of using cryptocurrencies to launder illegal phone and Internet fraud profits. The Payment and Clearing Association of China suggested that a growing number of crimes involved virtual currencies, with nearly 13% of illegal gambling sites supporting cryptocurrencies, while blockchain technologies make it harder for the authorities to trace the money.

The BIS report recommends that central bank digital currencies (CBDC) be launched as an alternative to private cryptocurrencies.

The CBDC implies that the general public, unlike in the current two-tier system (central bank – commercial banks), can access money online without going through financial intermediaries. In other words, all monetary units in circulation can become retail consumers’ direct financial claims on the central bank.

The functioning of such a one-tier payment system would mean competition to become suppressed while central banks would concentrate excessive assets and obligations in balancing them, which would make their management difficult. The idea is that most transactional tasks and work with CBDC consumers should be delegated to commercial banks and non-bank financial institutions offering retail services. At the same time, accounting for all retail transactions involving digital currency on the central banks’ balance sheet would preclude guaranteeing uninterrupted functioning of payment systems in case commercial operators encounter financial problems, since commercial operators would henceforth work with clients’ e-wallets instead of deposits. By issuing digital currency, central banks thus intend to advance the best possible integration of payment services with user platforms and other financial products. Efficiently recording and remembering all transactions within an economy, digital bookkeeping—based on distributed ledger or blockchain technology—is an important aspect of the CBDC. In this case, blockchain technology is intended to reduce costs and simplify payments.

Currently, China is testing just such a hybrid payment system with the digital yuan issued by the People’s Bank of China.


The desire of the Chinese authorities to curb cryptocurrency mining stems from fears of a disruption in the national payment system at a time when the digital yuan is experimentally introduced into the national economy. Currently, China’s socioeconomic development is already running many risks, such as a slowing pace of economic growth, trade confrontation with the U.S., non-bank intermediaries expanding their activities, which is hard to control, emerging real estate market bubbles, and rising commodity prices following the lifting of COVID-19 related restrictions. Full-fledged launch of the digital yuan could cut transaction costs and tighten control over the national financial system.

So far, no country has ever succeeded in maintaining global economic leadership without controlling global finance. Since the dollar and the euro stand firm and unshakeable in the global finance system, it is an urgent task for China to take the leading positions in Asia’s finance systems. A successful launch of the digital yuan could subsequently expand its use, for instance, to service transactions of the Belt and Road Initiative. Yet, should the digital experiment fail, investors’ interest in China’s economy might weaken, and this could dent China’s reputation as an economic, financial and technological superpower. It is, therefore, logical to assume that these considerations are the main reasons for the current ban on mining cryptocurrency in China.

As for the global crypto assets industry, China’s actions will hardly do it much damage in the medium-term. Over the past year, the cryptocurrency market has increased its capitalization five-fold as the overall number of cryptocurrencies has increased to 11,000. Both the general public and investors are obsessed with the idea of gaining super profits on a decentralized and unregulated market, and their uncoordinated actions will continue to ensure that crypto currencies remain highly volatile. Unlike the bitcoin, with its energy-intensive blockchain proof of work, other cryptocurrencies use the more energy-saving proof of stake method to verify transactions. Additionally, environmental problems created by mining bitcoin may be resolved in the future by transitioning to cleaner energy sources. Without the market craze surrounding crypto assets, it will be much harder to promote the idea of launching sovereign digital currencies.

[1]The Bank for International Settlements (BIS) is an international organisation covering the world’s 63 most influential central banks.

From our partner RIAC

Doctor of Economics, Senior Research Fellow and Professor in the Department of World Economy and World Finance of the Financial University under the Government of the Russian Federation, RIAC expert

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Can e-commerce help save the planet?



If you have logged onto Google Flights recently, you might have noticed a small change in the page’s layout. Alongside the usual sortable categories, like price, duration, and departure time, there is a new field: CO2 emissions.

Launched in October 2021, the column gives would-be travellers an estimate of how much carbon dioxide they will be responsible for emitting.

“When you’re choosing among flights of similar cost or timing, you can also factor carbon emissions into your decision,” wrote Google’s Vice President of Travel Products, Richard Holden.

Google is part of a wave of digital companies, including Amazon, and Ant Financial, encouraging consumers to make more sustainable choices by offering eco-friendly filter options, outlining the environmental impact of products, and leveraging engagement strategies used in video games.

Experts say these digital nudges can help increase awareness about environmental threats and the uptake of solutions to reduce greenhouse gas emissions.   

“Our consumption practices are putting tremendous pressure on the planet, driving climate change, stoking pollution and pushing species towards extinction,” says David Jensen, Digital Transformation Coordinator with the United Nations Environment Programme (UNEP).

“We need to make better decisions about the things we buy and trips we take,” he added. “These green digital nudges help consumers make better decisions as well as collectively drive businesses to adopt sustainable practices through consumer pressure.”

Global reach

At least 1.5 billion people consume products and services through e-commerce platforms, and global e-commerce sales reached US$26.7 trillion in 2019, according to a recent UN Conference on Trade and Development (UNCTAD) report.

Meanwhile, 4.5 billion people are on social media and 2.5 billion play online games. These tallies mean digital platforms could influence green behaviors at a planetary scale, says Jensen.

One example is UNEP-led Playing for the Planet Alliance, which places green activations in games. UNEP’s Little Book of Green Nudges has also led to more than 130 universities piloting 40 different nudges to shift behaviour.

A 2020 study by Globescan involving many of the world’s largest retailers found that seven out of 10 consumers want to become more sustainable. However, only three out of 10 have been able to change their lifestyles.

E-commerce providers can help close this gap.

“The algorithms and filters that underpin e-commerce platforms must begin to nudge sustainable and net-zero products and services by default,” said Jensen. “Sustainable consumption should be a core part of the shopping experience empowering people to make choices that align with their values.”

Embedding sustainability in tech

Many groups are trying to leverage this opportunity to make the world a more sustainable place.

The Green Digital Finance Alliance (GDFA), launched by Ant Group and UNEP, aims to enhance financing for sustainable development through digital platforms and fintech applications. It launched the Every Action Counts Coalition, a global network of digital, financial, retail investment, e-commerce and consumer goods companies. The coalition aims to help 1 billion people make greener choices and take action for the planet by 2025 through online tools and platforms.

We will bring like-minded members together to experiment with new innovative business models that empower everyone to become a green digital champion,” says Marianne Haahr, GDFA Executive Director.

In one example, GDFA member Mastercard, in collaboration with the fintech company Doconomy, provides shoppers with a personalized carbon footprint tracker to inform their spending decisions.

In the UK, Mastercard is partnering with HELPFUL to offer incentives for purchasing products from a list of over 150 sustainable brands.

Mobile apps like Ant Forest, by Ant Group, are also using a combination of incentives and digital engagement models to urge 600 million people make sustainable choices. Users are rewarded for low-carbon decisions through green energy points they can use to plant real trees. So far, the Ant Forest app has resulted in 122 million trees being planted, reducing carbon emissions by over 6 million tons.

Three e-commerce titans are also aiming to support greener lifestyles. Amazon has adopted the Climate Pledge Friendly initiative to help at least 100 million people find climate-friendly products that carry at least one of 32 different environmental certifications.

SAP’s Ariba platform is the largest digital business-to-business network on the planet. It has also embraced the idea of “procuring with purpose,” offering a detailed look at corporate supply chains so potential partners can assess the social, economic and environmental impact of transactions.

“Digital transformation is an opportunity to rethink how our business models can contribute to sustainability and how we can achieve full environmental transparency and accountability across our entire value chain,” said SAP’s Chief Sustainability Officer Daniel Schmid.

UNEP’s Jensen says a crucial next step would be for mobile phone operating systems to adopt standards that would allow apps to share environment and carbon footprint information.

“This would enable people to seamlessly calculate their footprints across all applications to develop insights and change behaviours,” Jensen said. “Everyone needs access to an individual’ environmental dashboard’ to truly understand their impact and options for more sustainable living.”

Need for common standards

As platforms begin to encode sustainability into their algorithms and product recommendations, common standards are needed to ensure reliability and public trust, say experts. 

Indeed, many online retailers are claiming to do more for the environment than they actually are. A January analysis by the European Commission and European national consumer authorities found that in 42 per cent, sustainability claims were exaggerated or false.

To help change that, UNEP serves as the secretariat of the One Planet network, a global community of practitioners, policymakers and experts that encourages sustainable consumption and production.

In November, the One Planet network issued guidance material for e-commerce platforms that outlines how to better inform consumers and enable more sustainable consumption, based on 10 principles from UNEP and the International Trade Centre.

The European Union is also pioneering core standards for digital sustainability through digital product passports that contain relevant information on a product’s origin, composition, environmental and carbon performance.

“Digital product passports will be an essential tool to strengthen consumer protection and increase the level of trust and rigour to environmental performance claims,” says Jensen. “They are the next frontier on the pathway to planetary sustainability in the digital age.”


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2022: Small Medium Business & Economic Development Errors



Calling Michelangelo: would Michelangelo erect a skyscraper or can an architect liberate David from a rock of marble? When visibly damaged are the global economies, already drowning their citizenry, how can their economic development departments in hands of those who never ever created a single SME or ran a business, expect anything else from them other than lingering economic agonies?

The day pandemic ends; immediately, on the next day, the panic on the center stage would be the struggling economies across the world.  On the small medium business economic fronts, despite, already accepted globally, as the largest tax contributor to any nation. Visible worldwide, already abandoned and ignored without any specific solutions, there is something strategically wrong with upskilling exporters and reskilling manufacturers or the building growth of small medium business economies. The SME sectors in most nations are in serious trouble but are their economic development rightly balanced?   

Matching Mindsets: Across the world, hard working citizens across the world pursue their goals and some end up with a job seeker mindset and some job creator mindset; both are good. Here is a globally proven fact; job seekers help build enterprises but job creators are the ones who create that enterprise in the first place. Study in your neighborhoods anywhere across the world and discover the difference.

Visible on LinkedIn: Today, on the SME economic development fronts of the world, clearly visible on their LinkedIn profiles, the related Ministries, mandated government departments, trade-groups, chambers, trade associations and export promotion agencies are primarily led by job seeker mindsets and academic or bureaucratic mentality. Check all this on LinkedIn profiles of economic development teams anywhere across the world.

Will jumbo-pilots do heart transplant, after all, economic performance depends on matching right competency; Needed today, post pandemic economic recovery demands skilled warriors with mastery of national mobilization to decipher SME creation and scalability of diversified SME verticals on digital platforms of upskilling for global age exportability. This fact has hindered any serious progress on such fronts during the last decade. The absence of any significant progress on digitization, national mobilization of entrepreneurialism and upskilling of exportability are clear proofs of a tragically one-sided mindset.

Is it a cruise holiday, or what? Today, the estimated numbers of all frontline economic development team members across 200 nations are roughly enough to fill the world-largest-cruise-ship Symphony that holds 6200 guests. If 99.9% of them are job-seeker mindsets, how can the global economic development fraternity sleep tonight? As many billion people already rely on their performances, some two billion in a critical economic crisis, plus one billion starving and fighting deep poverty. If this is what is holding grassroots prosperity for the last decade, when will be the best time to push the red panic button? 

The Big Fallacy of “Access to Finance” Notion: The goals of banking and every major institution on over-fanaticized notions of intricate banking, taxation are of little or no value as SME of the world are not primarily looking for “Access to Capital” they are rather seeking answers and dialogue with entrepreneurial job creator mindsets. SME management and economic development is not about fancy PDF studies of recycled data and extra rubber stamps to convince that lip service is working. No, it is not working right across the world.

SME are also not looking for government loans. They do not require expensive programs offered on Tax relief, as they make no profit, they do not require free financial audits, as they already know what their financial problems are and they also do that require mechanical surveys created by bureaucracies asking the wrong questions. This is the state of SME recovery and economic development outputs and lingering of sufferings.

SME development teams across the world now require mandatory direct SME ownership experiences

The New Hypothesis 2022: The new hypothesis challenges any program on the small medium business development fronts unless in the right hands and right mindsets they are only damaging the national economy. Upon satisfactory research and study, create right equilibrium and bring job seeker and job creator mindsets to collaborate for desired results. As a start 50-50, balances are good targets, however, anything less than 10% active participation of the job creator mindset at any frontline mandated SME Ministry, department, agency or trade groups automatically raises red flags and is deemed ineffective and irrelevant. 

The accidental economists: The hypothesis, further challenges, around the world, economic institutes of sorts, already, focused on past, present and future of local and global economy. Although brilliant in their own rights and great job seekers, they too lack the entrepreneurial job creator mindsets and have no experience of creating enterprises at large. Brilliantly tabulating data creating colorful illustrative charts, but seriously void of specific solutions, justifiably as their profession rejects speculations, however, such bodies never ready to bring such disruptive issues in fear of creating conflicts amongst their own job seeker fraternities. The March of Displaced cometh, the cries of the replaced by automation get louder, the anger of talented misplaced by wrong mindsets becomes visible. Act accordingly

The trail of silence: Academia will neither, as they know well their own myopic job seeker mindset. In a world where facial recognition used to select desired groups, pronouns to right gatherings, social media to isolate voting, but on economic survival fronts where, either print currency or buy riot gears or both, a new norm; unforgiveable is the treatment of small medium business economies and mishmash support of growth. Last century, laborious and procedural skills were precious, this century surrounded by extreme automation; mindsets are now very precious.  

Global-age of national mobilization: Start with a constructive open-minded collaborative narrative, demonstrate open courage to allow entrepreneurial points of views heard and critically analyze ideas on mobilization of small mid size business economies. Applying the same new hypotheses across all high potential contributors to SME growth, like national trade groups, associations and chambers as their frontline economic developers must also balance with the job creator mindset otherwise they too become irrelevant. Such ideas are not just criticism rather survival strategies. Across the world, this is a new revolution to arm SME with the right skills to become masters of trade and exports, something abandoned by their economic policies. To further discuss or debate at Cabinet Level explore how Expothon is making footprints on new SME thinking and tabling new deployment strategies. Expothon is also planning a global series of virtual events to uplift SME economies in dozens of selected nations.

Two wheels of the same cart: Silence on such matters is not a good sign. Address candidly; allow both mindsets to debate on how and why as the future becomes workless and how and why small medium business sectors can become the driving engine of new economic progress. Job seekers and job creators are two wheels of the same cart; right assembly will take us far on this economic growth passage. Face the new global age with new confidence. Let the nation witness leadership on mobilization of entrepreneurialism and see a tide of SME growth rise. The rest is easy.

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Rebalancing Act: China’s 2022 Outlook



Authors: Ibrahim Chowdhury, Ekaterine T. Vashakmadze and Li Yusha

After a strong rebound last year, the world economy is entering a challenging 2022. The advanced economies have recovered rapidly thanks to big stimulus packages and rapid progress with vaccination, but many developing countries continue to struggle.

The spread of new variants amid large inequalities in vaccination rates, elevated food and commodity prices, volatile asset markets, the prospect of policy tightening in the United States and other advanced economies, and continued geopolitical tensions provide a challenging backdrop for developing countries, as the World Bank’s Global Economic Prospects report published today highlights.

The global context will also weigh on China’s outlook in 2022, by dampening export performance, a key growth driver last year. Following a strong 8 percent cyclical rebound in 2021, the World Bank expects growth in China to slow to 5.1 percent in 2022, closer to its potential — the sustainable growth rate of output at full capacity.

Indeed, growth in the second half of 2021 was below this level, and so our forecast assumes a modest amount of policy loosening. Although we expect momentum to pick up, our outlook is subject to domestic in addition to global downside risks. Renewed domestic COVID-19 outbreaks, including the new Omicron variant and other highly transmittable variants, could require more broad-based and longer-lasting restrictions, leading to larger disruptions in economic activity. A severe and prolonged downturn in the real estate sector could have significant economy-wide reverberations.

In the face of these headwinds, China’s policymakers should nonetheless keep a steady hand. Our latest China Economic Update argues that the old playbook of boosting domestic demand through investment-led stimulus will merely exacerbate risks in the real estate sector and reap increasingly lower returns as China’s stock of public infrastructure approaches its saturation point.

Instead, to achieve sustained growth, China needs to stick to the challenging path of rebalancing its economy along three dimensions: first, the shift from external demand to domestic demand and from investment and industry-led growth to greater reliance on consumption and services; second, a greater role for markets and the private sector in driving innovation and the allocation of capital and talent; and third, the transition from a high to a low-carbon economy.

None of these rebalancing acts are easy. However, as the China Economic Update points out, structural reforms could help reduce the trade-offs involved in transitioning to a new path of high-quality growth.

First, fiscal reforms could aim to create a more progressive tax system while boosting social safety nets and spending on health and education. This would help lower precautionary household savings and thereby support the rebalancing toward domestic consumption, while also reducing income inequality among households.

Second, following tightening anti-monopoly provisions aimed at digital platforms, and a range of restrictions imposed on online consumer services, the authorities could consider shifting their attention to remaining barriers to market competition more broadly to spur innovation and productivity growth.

A further opening-up of the protected services sector, for example, could improve access to high-quality services and support the rebalancing toward high-value service jobs (a special focus of the World Bank report). Eliminating remaining restrictions on labor mobility by abolishing the hukou, China’s system of household registration, for all urban areas would equally support the growth of vibrant service economies in China’s largest cities.

Third, the wider use of carbon pricing, for example, through an expansion of the scope and tightening of the emissions trading system rules, as well power sector reforms to encourage the penetration and nationwide trade and dispatch of renewables, would not only generate environmental benefits but also contribute to China’s economic transformation to a more sustainable and innovation-based growth model.

In addition, a more robust corporate and bank resolution framework would contribute to mitigating moral hazards, thereby reducing the trade-offs between monetary policy easing and financial risk management. Addressing distortions in the access to credit — reflected in persistent spreads between private and State borrowers — could support the shift to more innovation-driven, private sector-led growth.

Productivity growth in China during the past four decades of reform and opening-up has been private-sector led. The scope for future productivity gains through the diffusion of modern technologies and practices among smaller private companies remains large. Realizing these gains will require a level playing field with State-owned enterprises.

While the latter have played an instrumental role during the pandemic to stabilize employment, deliver key services and, in some cases, close local government budget gaps, their ability to drive the next phase of growth is questionable given lower profits and productivity growth rates in the past.

In 2022, the authorities will face a significantly more challenging policy environment. They will need to remain vigilant and ready to recalibrate financial and monetary policies to ensure the difficulties in the real estate sector don’t spill over into broader economic distress. Recent policy loosening suggests the policymakers are well aware of these risks.

However, in aiming to keep growth on a steady path close to potential, they will need to be similarly alert to the risk of accumulating ever greater levels of corporate and local government debt. The transition to high-quality growth will require economic rebalancing toward consumption, services, and green investments. If the past is any guide to the future, the reliance on markets and private sector initiative is China’s best bet to achieve the required structural change swiftly and at minimum cost.

First published on China Daily, via World Bank

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