The People’s Bank of China is devising a program to provide as much as 500 billion yuan (US$69 billion) to support innovation in science and technology.

It’s a “relending” scheme, meaning that the PBOC will extend credit to select institutions that lend funds to targeted sectors in need of monetary support. Having unveiled the enterprise on April 7, during US Treasury Secretary Janet Yellen’s visit to Beijing, the Communist Party is demonstrating why Washington’s hopes for massive reflationary stimulus seem unlikely to happen. ⠀

Some believe the PBOC must learn from Japan’s mistakes in the 1990s and print yuan aggressively to head off deflation. Others think structural reforms to fix China’s property crisis, strengthen capital markets and address record youth unemployment are far more urgent.

But President Xi Jinping’s team appears to favor a third way – hyper-targeted liquidity infusions coupled with efforts to shift growth engines towards tech-driven future industries that increase disruption and productivity – and, in this case, aimed directly where the PBOC’s liquidity might play a key role in driving China upmarket. ⠀

Yellen made a point of shouting out Deng Xiaoping’s 1992 visit to manufacturing and export powerhouse Guangzhou. It marked a key milestone in China’s progress in becoming a market economy, one that Yellen hopes the Xi era will emulate by leveling playing fields for Western companies. ⠀

She added that many corporate CEOs worry about “the impacts of China’s shift away from a market approach.” ⠀

Yet so much of Yellen’s pitch in recent days has been prodding China to shift stimulus efforts into higher gear. And there’s a lost-in-time element to Washington’s latest pleadings.

Yellen’s comments echo those Washington directed at Japan in the mid-to-late 1990s.

What Yellen is advocating is a strategy that Japan has been pursuing for 25-plus years with mediocre success. Opening the fiscal and monetary floodgates year after year surely propped up gross domestic product here and there. But without bold supply-side reforms, all Tokyo did was address the symptoms of the weak demand behind its multi-decade funk.

Today, Japan faces by far the largest debt burden among developed nations — roughly 260% of GDP. The Bank of Japan, meanwhile, has kept interest either near zero, or below, since 1999. Six years ago, the BOJ’s balance sheet even topped the size of its US$4.7 trillion economy, a first for a Group of Seven economy. ⠀

China must avoid this formula for economic mediocrity, no matter how much flack Xi’s inner circle gets from Yellen & Co. Judging from the events of the last two months, Beijing is indeed picking up the pace in that direction.

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