Learning from China’s economic philosophy and policy — X

China has retained certain features that differ from those of advanced market economies—as indicated in The Handbook of China’s Financial System—because its needs are determined by the transitional nature of its shift from a developing country to an advanced economy.

During the 1980s, Chinese policymakers engaged in vigorous internal debate regarding whether to adopt “shock therapy” policies. Ultimately, they rejected these measures to avoid the pitfalls of neoliberal austerity, which has produced profound economic misgivings globally over the last four decades.

A clear example of these misgivings can be seen in Pakistan, which has followed neoliberal austerity policies for decades by significantly reducing the public sector’s footprint in economic policymaking and regulation. This approach has elevated financial instability both within individual nations and globally, leading to more frequent and intense financial crises.

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

Consequently, these policies have accelerated the climate crisis, increased inequality, reduced economic resilience, and diminished the power of the political voice.

To highlight this aspect further with regard to the ‘transitional’ nature of Chinese economy, the same handbook pointed out: ‘On June 24, 2016, the then-governor of the People’s Bank of China (PBC), Zhou Xiaochuan, delivered the 2016 Michel Camdessus Central Banking Lecture, titled “Managing Multi-Objective Monetary Policy: From the Perspective of Transitioning Chinese Economy,” at the International Monetary Fund (IMF) in Washington, DC.

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

During the lecture, Governor Zhou observed that “as China has the feature of both a large transition economy and an emerging market economy, the central bank of China and its monetary policy are yet to be well understood by the outside world.”’

Hence, given the success of the wholesome policy, and audit approach adopted by China, within which lies the role of monetary policy, and the extent of central bank independence are nested as subservient to the overall economy goals of the country in a coordinated, and unified way. This should provide an important learning opportunity for Pakistan, which apparently has not been served well through the neoliberal thought process in terms of reaching an appropriately desirable level of central bank independence.

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

Hence, the country should try to enhance its understanding of an otherwise not so ‘well understood’ monetary policy framework adopted by China.

Within the ambit of conduct of an appropriate monetary policy is to lower risk of non-performing loans (NPLs) in an overall effort to rein in profit-making to avoid financial crises as much as possible.

Diminishing role of regulation under the neoliberal assault led to the Global Financial Crisis 2007-08, whereby very risky loans were made over the years.

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

On the contrary, China by not adopting over-board deregulation, and liberalization policies under Neoliberalism, remained significantly cautious towards keeping the economy at a low risk level by putting in place a highly meaningful level of regulation of banking sector, and overall capital controls, in turn, not giving in to shock therapy policies of diminishing the role of public sector oversight of economy, including the financial sector.

In Pakistan, a primary reason for non-performing loans (NPLs) has been a loosening focus on implementing meaningful regulation and capital controls under a neoliberal policy mind-set over the years. Consequently, the financial sector has traditionally suffered from significant levels of NPLs.

This issue is driven by an overriding motivation to issue loans based purely on profit signals, rather than considerations of productive and allocative efficiencies.

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

Furthermore, credit allocation has failed to maintain the policy space necessary to foster economic inclusivity and resilience through strategic financing.

The same handbook regarding China’s financial system pointed out in this regard: ‘In the late 1990s, as a result of the Asian financial crisis and management problems within the Chinese banks, substantial non-performing loans accumulated in China’s banking system, preventing the banks from making new loans.

To deal with the challenges caused by the financial crisis, the Chinese government urgently needed both to recapitalize the state-owned banks and to lower the amount of the non-performing loans. …The Chinese government created a new scheme that distinguished “good” banks from “bad” ones.

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

By carving out the nonperforming assets from “good banks” and concentrating the bad assets in “bad banks,” the Chinese government ensured that the “good banks” could operate normally.’

A distinguishing feature is the high level of democratic input, through the country’s ‘highest organ of state power’ in the shape of National People’s Congress (NPC) selecting banks for capital injections. This is in contrast to such decisions made under limited orientation of public sector under the neoliberal assault, whereby such decisions are considered mostly at the cabinet level, based on the input mainly from the central bank. This in China would be like taking the decision at the State Council level on the basis of central banks’ input.

Hence, not just the executive branch (SC) is involved but larger discourse is engaged in the shape of NPC to address how best public finance is utilized to support deserving banks.

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

The extensive diversity of opinion reflected in the NPC can be gauged from the details provided by the ‘responsibilities’ section of NPC as ‘The NPC is the highest organ of State power in China. It is composed of NPC deputies who are elected from 35 electoral units according to the law. These units include people’s congresses of provinces, autonomous regions, municipalities directly under the central government, the servicemen congress of the People’s Liberation Army, the deputy election council of the Hong Kong Special Administrative Region, the deputy election council of the Macao Special Administrative Region and the Taiwan compatriots’ consultation election council.’

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

Moreover, unlike the countries following neoliberal policies, whereby as a result of these shock therapy policies, overall reining in of regulation, which saw a diminishing trend, resulted in over-financialization that resulted in significant rise in risky loans made by the banks, which resulted in the increase in the frequency of financial crises over the decades, especially in terms of GFC 2007-08, China remained cautious, putting in place strong regulatory mechanisms over different phases of its overall financial sector situation, including banking sector. This provided it the financial stability that was necessary for the impressive economic growth, overall, for many years now; not to mention, as indicated before, the extensive footprint of government deposits in banks allowed it to play a meaningful role to balance the profit objectives of the banks with the overall efficiency, and productive needs of the real economy.

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

The same handbook highlighted the overall extensive role of public sector guiding the financial sector in China in a purpose-driven way to deliver greater productive and allocative efficiency for the real sector in an inclusive, and mission-oriented way to overall boost economic growth, while placing macroeconomic stability on a strong footing by putting aggregate demand of finance towards more meaningful level of investments, resulting, in turn, in timely and more diverse scope of aggregate supply. This experience provides a substantial learning curve for countries, including Pakistan, which are following neoliberal policies, which favour virtually unfettered markets, and overall little role of public sector.

(To be continued…)

Copyright Business Recorder, 2026