China has institutional advantages it can rely on

Editor's Note: At the International Finance Forum in Guangzhou, capital of Guangdong province, Zhou Xiaochuan, former governor of the People's Bank of China, said the negative interest rates adopted by the central banks across the world and the long-term deflation and fiscal imbalance are causing unprecedented policy uncertainty. 21st Century Business Herald comments:

After 2008, developed economies turned to quantitative easing policies in the hope of stabilizing the financial markets and stimulating the private sector to invest. However, the private sector has not invested heavily even with the lowest interest rates.

The advanced economies lack technological innovation, and the return on capital is falling. Emerging economies are also catching up with them, they need to use the opportunity of ultra-low interest rates to issue bonds, provide financial stimulus in infrastructure and the public sector, and invest in innovation. However, due to the constraints of their political systems and neo-liberalism, fiscal stimulus is very difficult. They can only choose and rely on monetary quantitative easing policies, while the private sector lacks profitable investment objectives and is subject to assets and liabilities.

China's problem lies in its investment-led growth model, which has caused excessive fiscal spending by local governments, overcapacity in traditional industries and high asset prices. Therefore, China cannot allow local debts to rise indefinitely as it would fuel financial risks. Overcapacity and asset bubbles in the traditional economy also limit China's ability to stimulate economic growth through an expansionary monetary policy. This means China does not need a negative interest rate policy just as developed economies do.

China should first implement an innovation-oriented strategy, and China should not resort to the extensive government borrowing-based investment model.

China has to endure pain in the process, sharpen its ability and prepare itself for the process.

The country must rely on its institutional advantages to build a new national system for key core technologies to tackle scientific and technological problems, and at the same time respond to the technological blockade of developed countries.