Concluding Remarks and Recommendations

Abstract

The aim of this chapter is to recap the nature of the ‘new normal’ growth of the Chinese economy and the constraints of the foregoing dynamism of the development processes. Among other factors, the following main obstacles for the further rapid economic growth can be enumerated: falling global and local demand, excessive debt and potential bubbles in the real estate and stock exchange markets, increasing shadow banking and its interconnectedness with the regular banking sector and the risk of capital flight. The main focus is directed at the verification of the impossible trinity theory in China’s economic circumstances. During the last decade, the authorities tried to maintain the major aims of the theory at the same time, which means to circumvent the Mundell-Fleming model to some extent. In order to fulfill the aims of the ‘new normal’ economy, China needs to bend the rule and implement all three policy aims of the trinity in its own way. Due to the ineffectiveness of the demand-side monetary policy stimulus, implemented after the GFC, nowadays the Chinese authorities opt for a focus on a targeted fiscal policy and supply-side structural reforms. Such approach will support aggregate demand and growth, and at the same time will enable to reform and rebalance the economy in the longer term. To some extent, the BRI and its investments create an important stimulus in the route to a more sustainable economic growth path, however, at the same time it enforces more openness and a liberalized approach to the capital flows. Taking into account the growing impact of China’s shadow banking on its financial system, it is likely that the authorities have to give up the monetary autonomy for further strengthening the financial stability added as a fourth element of the impossible trinity theory after the GFC. As a result, the PBC might be focused more on currency stability than the monetary autonomy. In the near future and in combination with more capital liberalization this will cause the necessity to focus more on financial stability.