Learning from China’s economic philosophy and policy — VIII

With regard to China’s financial system, and how it is effectively reined in to appropriately gel with fiscal policy and overall democratic checks, and balances ‘The handbook of China’s financial system’ pointed out the following: ‘Today, China does have a comprehensive monetary policy framework, which contains almost all parts of typical monetary policies in advanced market economies, such as the United States and the eurozone.

It has a central bank, a Monetary Policy Committee (MPC), a number of policy instruments, several intermediate targets, and some policy objectives. But in almost every respect, The Chinese monetary policy differs from those of advanced market economies: The PBC [People’s Bank of China] is not an independent central bank; the MPC plays only advisory roles at best; there are multiple policy objectives, including growth, employment, inflation, external account, reform, economic structure, household welfare, and financial stability; and the policy tools are mostly quantitative instruments, rather than price-based instruments like short-term market interest rates.’

Also read: Learning from China’s economic philosophy and policy – I

In terms of monetary policy formulation in China itself – unlike Pakistan, and many countries that followed in the footsteps of monetarist, or closely related neoliberal school of thought – the natural discourse is considered to be at least regulated central bank. Under the neoliberal assault that diminishes the role of public sector, lowers the role of public opinion and, in turn, public accountability, and overall diminishes the footprint of democracy in economic decision-making, and in particular that of monetary-fiscal policy coordination.

In contrast, in China, there is significantly much greater monetary-fiscal coordination under an overall democratic institutional setup. At the same time, greater political stability and a higher level of democratic accountability in China allow for meaningful oversight to ensure that economic policies—both monetary and fiscal—work in unison, and that internal consistency in monetary policy decisions is based on technical arguments and logical merit, rather than being swayed by political business cycles.

Here, it needs to be pointed that China is not alone in supporting a more conservative role of central banks, and seeing central bank independence (CBI) in that light, but also increasingly heterodox perspectives of economic research over the decades have been all the more supporting this perspective, especially, given the over-board practice of austerity – aggregate demand squeeze – policies in the wake of Global Financial Crisis 2007-08, and also the highly sub-optimal financial/banking regulation role – another consequence of the neoliberal assault recommending highly limited role of regulation in economic management – played by central banks in general, which significantly contributed to the build-up of GFC in the first place. Such neoliberal approach basically stemmed from an imbalanced emphasis of reining in inflation from the aggregate demand channel, while not sufficiently focusing on the aggregate supply side.

Also read: Learning from China’s economic philosophy and policy — II

This has, in turn, called loudly over the years for widening the mix of economists and policymakers to achieve a more balanced impact of orthodox and heterodox perspectives on overall economic policy. This means, for instance, expanding the pool of economic decision-makers at central banks or ministries of finance to include those who are not over-influenced professionally by a neoliberal or austerity-driven economic philosophy.

Among those voices, comes a 2025 ‘Edward Elgar’ published edited book ‘Intermediate Macroec onomics: theory, policy and competing perspectives’, which questions the high level of central bank independence under mainstream/neoliberal economic thought-process. So, while China with its impressive economic management has shown the way in terms of better handling for instance central bank independence, heterodox economic thought process has all the more provided a formalized economic response over the years on lines similar to the ways China has managed economic decision-making.

Also read: Learning from China’s economic philosophy and policy — III

The book argues against the logic of adopting largely unhinged central bank independence, with least control by democratically elected government, and having unity of goal in the shape of central banks delivering on the commitment of low, and steady inflation – as is being strongly advised through mainstream economics, including that by Bretton Woods institutions like IMF – asking in turn ‘…if it is assumed that low inflation improves economic performance, then they [central banks] must have all the necessary tools at their disposal, and be allowed to pursue what is needed to fight inflation, even if it is unpopular.

For instance, in the post-pandemic era, central banks [in a number of major Western capitals] raised interest rates to around 5 percent in order to fight inflation, which had tremendous negative consequences, yet was deemed necessary. All in all, then, the conduct of monetary policy should be independent from any and all possible influence from elected officials.’

Also read: Learning from China’s economic philosophy and policy —IV

In replying to this question, the book points out the following: ‘…the evidence on the relationship between CBI and growth and inflation is not clear, and is at best mixed. In other words, it is not at all clear that countries with greater, transparent, and independent central banks necessarily perform any better economically. …this quest [of pursuing high level of CBI] is perhaps driven by ideology or interest rather than theory. …CBI is interpreted as being independent from government [concept resulting from a neoclassical/mon etarist/ne oliberal economic thought process basis]. Yet, nothing is discussed in terms of independence from financial markets or financial interests. Accordingly, one could argue that the decision to fight inflation is not to make goods more affordable for the working class.

In this sense, attempts to lower inflation aim to preserve the value of the rentier class. In this sense, attempts to lower inflation aim to preserve the value of wealth. Central banks, therefore, are not independent from the rentier class.’

Also read: Learning from China’s economic philosophy and policy — V

China, for instance, provides a strong sense of direction by rejecting neoliberal economics in its overall economic and monetary policies. This approach avoids the pitfalls of excessive wealth, concentrated power, and the corrupt networks that serve vested interests.

A Central Bank Independence (CBI) framework alone cannot tackle these issues consistently. Instead, containing these excesses requires a well-meaning political system with strong internal checks and balances, a democratic foundation (demos), a benevolent sense of national pride, and a commitment to public service. Consequently, this model restricts the CBI to its proper role: providing highly pluralistic, independent, and technically sound policy advice.

The same macroeconomics book (quoted above) by indicating the following, in turn, is what China has otherwise been so successful in doing by appropriately bringing plurality of thought in central bank, and hence not following neoliberal thought process on balance, and reining in CBI by putting it under an overall economic decision-making umbrella.

Also read: Learning from China’s economic philosophy and policy — VI

The same macroeconomic book, hence, indicated ‘…Gerald Epstein (2015, p. 106) suggested when he argued in terms of “contested terrain” [that] “Where central banks are ‘independent’ of the executive branch of government, they tend to be dependent to the financial sector for political support, and therefore tend to make policy with ‘finance coloured’ glasses.” A number of post-Keynesian and heterodox-friendly scholars have made similar arguments. For instance, Peter Dietsch, Francois Claveau and Clement Fontan (2018) unabashedly ask in the title of their book, Do Central Banks Serve the People?, thereby questioning the very motive behind monetary policy.’

Hence, rather than China leaving it to the central banks to fill the ‘trust and competence’ gap of government, by giving them large-scale independence to decide correctly instead, it has formulated an institutional setup to oversee by opening itself to the checks and balance of public accountability through involving elected representatives, who are also well-versed in economic education, providing a mix of individuals within the setup that reflects a plurality of economic thought, and deciding in accordance with their mandate as public representatives.

The same handbook with regard to China’s financial system (quoted several times previously in this article) pointed out with regard to China’s monetary policy: ‘The first thing to notice about the actual working mechanism of China’s monetary policy is that the PBC is not an independent central bank. Instead, as of March 2018, the PBC is one of the 26 State Council’s ministries. The PBC law states explicitly that the PBC makes and implements monetary policy under the leadership of the State Council.

Also read: Learning from China’s economic philosophy and policy — VII

The PBC law requires that the PBC regularly report to the National People’s Congress on conditions of monetary policy and financial industry. Additionally, the PBC law stipulates that the PBC set up the MPC, which should play important roles in macroeconomic regulation and also in making and adjusting monetary policies. In reality, however, the MPC, which is chaired by the PBC governor and joined by senior officials of various economic ministries and agencies as well as several academic experts, plays at most advisory roles in formulation of monetary policies. …the State Council decides on key policy targets, including a GDP growth rate and an inflation rate, which is approved by the National People’s Congress. …when key economic indicators deviate from the respective targets, the PBC prepares proposed plans for monetary policy actions and submits to the State Council. …the State Council reviews the recommendations and makes the final decision.’

Highlighting China’s fiscal-monetary coordination process, and a wholesome approach towards broader economic goals, where policy innovation in the spirit of adopting overall non-shock therapy policies through adopting ‘dual-track’ pricing mechanism to reach a meaningful level of price stability, while incentivizing agriculture, and industrial production in a purpose-driven way of overall reaching productive- and allocative efficiencies that enhance resilience in a green and high-tech way, the same handbook pointed out: ‘It is possible that Chinese monetary policy framework will converge, in many ways, to those of the advanced market economies. For instance, the PBC [People’s Bank of China, which is central bank of China] may over time gain more independence in monetary policymaking.

The MPC [Monetary Policy Committee] may become a decision-making body. The list of policy may be reduced to primarily focus on inflation. The PBC may also select a short-term market interest rate as its operational target. …But it is also possible that, for quite a long time, the Chinese monetary policy framework will retain certain features different from those of the advanced market economies. For example, other economic ministries may continue to give input into the decision-making process, through the State Council [SC], the MPC, or the newly established State Council Financial Stability and Development Committee (FSDC).’

(To be continued)

Copyright Business Recorder, 2026