Harnessing sovereign money for development finance and solving the debt conundrum: the case of China

This chapter employs a Modern Money Theory approach to show that the State and public money play an indispensable role in creating development finance. It demonstrates that the Chinese State has utilized its sovereign monetary power to provide development finance and promote economic growth in the past decades. The State engages in large-scale public investments and sets up policy banks and state-owned commercial banks to create and extend credit to finance infrastructure, industrial production and other developmental projects. However, the rapid expansion of public investment in infrastructure and private investment in real estate since the Global Financial Crisis have generated excessive debt in the real estate sector and in the local governments. To deleverage private and local government debt, the central government must leverage up, increasing fiscal spending and fiscal transfers to local governments.