The grand narrative of China's reform and opening-up has been one of remarkable growth, achieved through bold experimentation. However, as the landscape shifts from fuel-powered vehicles to intelligent driving and from mobile payments to the digital yuan, the old growth models are eroding, necessitating the activation of new economic drivers. In his new work examining this transition, economist Pan Helin moves beyond traditional macroeconomic narratives. Grounded in the principle that "practice is the sole criterion for testing truth," the book offers a deep analysis of the "old logic" that fueled China's success over the past four decades and charts a path for the "new logic" required for the future.
The book employs a clear framework of "old logic, new challenges, new drivers" to systematically trace China's economic evolution from scale expansion to innovation-driven growth. It begins by reviewing six pillars of the old logic: reforms to the distribution system, economies of scale, land-based public finance, financial leverage, globalization, and the network economy. It then analyzes six corresponding challenges: common prosperity, involutionary competition, financial opening, deglobalization, and technological rivalry. Finally, it proposes six new drivers with a forward-looking perspective: redistribution, countering involution, new-type urbanization, financial globalization, global leadership, and rejuvenation through science and technology.
The book's central thesis is that China's economy stands at a critical crossroads, transitioning from a "scale economy" to an "innovation-driven" model. Past success relied on demographic dividends, land finance, and the scale effects of globalization. The future challenge lies in breaking the cycle of "involution" and building new growth poles through property rights incentives, financial opening, and technological breakthroughs. Understanding the underlying logic of this shift is crucial for grasping the institutional dividends and commercial opportunities of the next decade.
This article focuses on two of the book's most practically relevant dimensions: financial deleveraging and capital influence, extracting its core insights for the current transformation.
The Old Logic and New Challenges for China's Financial Sector
The development of China's financial sector has historically been built on "monetization" and "capitalization." Reforming the financial system to efficiently channel monetary capital into the real economy was key to compressing centuries of Western industrialization into decades. However, the cost of this model has been a high debt-to-leverage ratio. Consequently, "deleveraging" has become the central task for China's financial sector in seeking a new path.
Simultaneously, as the dominant force in global resource allocation and profit distribution, the openness of a nation's financial sector directly determines its global influence. If joining the WTO in 2001 was the first wave of opening-up红利 for China's economy, then the opening of financial capital represents the potential second wave. In this process, China must not only resolve internal debt issues but also enhance its voice in the global economy through financial openness.
The New Logic of Deleveraging: From Incremental Expansion to Stock Optimization
To mitigate debt risks, the first step is distinguishing "good debt" from "bad debt." Based on the fiscal balance formula (fiscal expenditure = fiscal revenue + fiscal deficit), government borrowing is essentially borrowing from the future and must be constrained. "Good debt" either generates positive returns (e.g., a park recouping costs through tickets and leases) or yields significant social benefits (e.g., a subway easing traffic congestion). Therefore, the core of deleveraging lies in replacing "bad debt" with "good debt" and enforcing fiscal discipline to constrain current borrowing.
1. Increasing Revenue: The Ebb of Land Finance and Exploring New Taxes
Local governments face the dilemma of "land finance" nearing its end as urbanization slows, making non-tax revenue unstable. Future revenue growth must rely on expanding the tax base, primarily through: First, comprehensive tax collection: utilizing tools like the Golden Tax System Phase IV to strengthen collection, eliminate loopholes, ensure fair competition, and simplify the tax system. Second, developing new tax sources: focusing on consumption tax (allocated to local governments), property tax, and inheritance tax. While property tax has the potential to replace land finance, its full implementation awaits a stabilization of housing prices and leverage ratios to avoid triggering sell-offs and public pressure. Inheritance tax faces the challenge of capital flight by the wealthy and would require配套 policies like charitable trusts.
2. Debt Disposal: Historical Experience and the Current Toolbox
China has undergone two major deleveraging rounds: the 1998 state-owned enterprise reforms and the 2015 resolution of local implicit debt. The current approach centers on debt swaps and increasing debt quotas. According to Ministry of Finance disclosures, starting from 2024, 800 billion yuan from the annual new local government special bond quota will be allocated specifically for debt resolution for five consecutive years, cumulatively allowing for the swap of 4 trillion yuan in implicit debt. Combined with the 6 trillion yuan debt quota increase approved by the National People's Congress Standing Committee, this directly provides 10 trillion yuan in resources for local debt resolution.
However, simply transferring debt—such as swapping urban investment bonds for local government bonds—while addressing immediate needs, leads to a rise in explicit government debt, approaching or even exceeding the 60% of GDP警戒线. Therefore, more diversified disposal methods are essential:
First, Debt Transfer: Shifting debt to banks or asset management companies. However, the lack of a bankruptcy mechanism for local governments makes this transfer difficult.
Second, Austerity-Based Resolution: Selling idle government assets (e.g., state-owned enterprises, infrastructure) or reducing non-essential expenditures. China's unique存量 of government assets makes this path feasible.
Third, Debt Forgiveness: Currently not feasible domestically, as local governments lack the concept of bankruptcy, and the principle of "whoever's child it is must hold them" applies.
Fourth, Debt Monetization (Quantitative Easing): While the central bank can expand its balance sheet to buy bonds, this极易 triggers恶性 inflation (as seen in the U.S. 2021-2022 experience) and should only be an emergency measure, not routine.
Fifth, Leveraging Up to De-leverage: The government acts as an "investment company," borrowing to invest in high-growth tech firms or引入民间 capital (PPP/mixed-ownership reform), using investment returns to cover debts. This requires improved government decision-making efficiency and tolerance for investment risk.
Building Capital Influence: From Stock Competition to Global Deployment
The influence of capital is essentially the influence of currency. The world is currently in a transitional period marked by a relative decline in U.S. dollar influence and the rise of a multipolar currency system.
1. International Environment: The Weakening Dollar and China's Opportunity
High fiscal deficits are prompting a strategic global retrenchment by the U.S., weakening its ability to project technological, military, and financial power globally, which in turn undermines the dollar's purchasing power and回流机制. The world urgently needs new currencies to fill the vacuum. With its independent economic and political system, China should not passively配合 the U.S. in reversing deficits but should leverage this "vacuum period" to expand its financial influence.
2. The Necessity and Feasibility of Financial Opening
Necessity: China faces insufficient total factor productivity. Compared to the long-term investment required for technological innovation, learning from international financial experience is a faster path to wealth creation.
Feasibility: Based on the "Impossible Trinity" (free capital flow, fixed exchange rate, and independent monetary policy cannot coexist), China historically sacrificed free capital flow for exchange rate stability and policy independence. However, with accumulated foreign exchange reserves, China now possesses a foundation for opening. Allowing capital outflow (e.g., corporate overseas investment) and inflow (e.g., Stock Connect schemes) can enhance economic and financial resilience.
3. The Path and Challenges of RMB Internationalization
For the Renminbi to become a global currency, it must cross several thresholds:
First, Achieving Free Convertibility: Currently managed through a dual-track system ("offshore" in Hong Kong + "onshore" in mainland) and tools like the "counter-cyclical factor." Long-term, it requires resolving market-clearing issues to move toward a managed float and free convertibility.
Second, Encouraging the World to Hold RMB: Currently achieved mainly through bilateral currency swaps, but often with countries holding low外汇 reserves, offering limited real benefit. The future requires expanding the domestic consumer market and increasing imports, encouraging trade surplus countries (e.g., Germany, Japan) to hold RMB due to trade surpluses with China.
Third, Maintaining an Appreciation Expectation: A currency's essence is credit and assets. The RMB needs to sustain an appreciation expectation by enhancing China's comprehensive global influence (technology, military, trade) to attract long-term holders.
Fourth, Strengthening Outbound Investment and Regional Cooperation: Compared to无偿 aid, investment builds more enduring利益纠葛 and influence. Implementing development initiatives through platforms like the Belt and Road Initiative and APEC can create win-win outcomes and完善 high-level opening-up mechanisms.
Over the past two decades, China's economic prosperity was primarily driven by real estate and export-oriented manufacturing. For the next two decades, financial opening is poised to become one of the key driving forces. This requires not only building a more professional and internationalized financial institution system but also steadily advancing the RMB internationalization process under可控 risk. By actively resolving internal debt risks, optimizing fiscal structures, and effectively participating in global capital allocation, China can continuously strengthen its influence in the wave of financial globalization and achieve the historic transition from a scale economy to an innovation-driven model.
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