Bank of China Chief Economist Uses MMT to Challenge Ray Dalio’s Debt Concerns

A High-Profile Endorsement of Modern Monetary Theory in Chinese Economic Debate

For the first time, a figure of this caliber has publicly endorsed Modern Monetary Theory (MMT) by name—specifically the framework developed by Warren Mosler.

Xu Gao is no ordinary participant in the economic debate that has fueled public discourse in China and worldwide between deficit hawks and doves. He serves as Chief Economist at Bank of China International, one of the world’s largest banks, directly controlled by the Chinese state and the most internationally oriented of Chinese banks, with offices across 27 countries on all continents.

As Beijing pushes its deficit-to-GDP ratio to record levels and launches its largest fiscal stimulus campaign since the global financial crisis, proponents on both sides of the Chinese government’s spending policy debate draw inspiration from heterodox macroeconomic views originating in the Western world. However, unlike in the United States and especially in Eurozone Europe—where the correct path seems accessible only to a handful of experts, unfortunately barred from government institutions—in China, by contrast, those governing the country appear to have grasped perfectly how modern currency works and the nature of monetary operations conducted with sovereign currency.

As with the overwhelming majority of European leaders, Chinese deficit “hawks” also find support for their arguments against fiscal spending in the popular works of celebrated hedge fund manager Ray Dalio, who maintains that excessive debt accumulation inevitably leads to financial crises. But in stark contrast to what happens in Rome and Brussels, in Beijing the counterpart represented by spending “doves”—who favor deficit spending as a reliable means to support the Chinese economy—fortunately finds itself within the main government institutions. And remarkably, they even invoke Modern Monetary Theory (MMT) to bolster their positions.

This division remains sharp in China as well, not without heated debates. Yet the fierce attack challenging Ray Dalio’s works and ideas comes not from the usual MMT activist, as occurs in our countries, but from the chief economist of China’s largest public bank—explicitly citing Mosler’s thinking when arguing that China must increase its debt levels rather than pursue the “beautiful deleveraging” prescribed by Dalio.

This is not to hide the fact that Dalio’s books enjoy tremendous success in China, and his views have found a receptive audience among many economists amid concerns about fiscal policy that has maintained an expansionary stance for much of the period following the global financial crisis. What I want to emphasize is that such harmful ideas, unlike in our government’s chambers, have not taken root in Beijing’s halls of power. And the results in terms of economic well-being for the Chinese people are evident!

Dalio’s Framework and Its Limitations

Ray Dalio is the founder and co-chief investment officer of Bridgewater Associates, once considered the world’s largest hedge fund. His core macroeconomic thesis holds that excessive debt creation cycles have been the primary cause of financial crises since World War II.

“In the long run, debts cannot rise faster than the incomes needed to service them, and interest rates cannot be too high for debtors or too low for creditors for very long,” Dalio writes.

This represents one of the classic concepts of business economics that, however, as sound economic doctrine and logic demonstrate, applies to companies and households—entities belonging to the private sector that are “users” of currency. The situation differs entirely for the state, which instead “issues” under monopoly conditions the currency that drives the country’s economic system. Currency issuers do not need to operate in terms of costs and revenues, nor any necessity to generate income. They can obtain everything they desire, starting with labor, simply by spending the currency they create. Therefore, even the concept of “debt” in the strict sense—or any other type of liability denominated in one’s own currency—loses all meaning when borne by the state.

In other words, to be even clearer and more direct, Dalio’s “postulates” clearly demonstrate his failure to understand the public monopoly nature of all the dollars, euros, yuan, etc. that comprise his wealth. Had governments not issued and then spent them, even Dalio would have zero in his account, like most people today who struggle to make ends meet because governments don’t spend sufficiently to provide them with employment and decent wages.

“Major debt crises occur when the amount of debt assets and liabilities becomes too high relative to the amount of money in circulation and/or the quantity of goods and services in circulation.” This is another concept dear to Dalio, subject to the same reasoning. Certainly, crises occur from disproportionate debt increases, but from “private” debt, certainly not “public” debt. These two accounting entities move in virtually opposite directions, and pairing them—let alone adding them together—is entirely incorrect when attempting to form a macroeconomic judgment about a country’s economic health.

Public debts, as an accounting entity, represent to the penny the net savings total of the private sector. Understanding this makes it easy to grasp how reducing public debt—which Dalio himself proposes to resolve crises—is actually their cause. By reducing public debt, you reduce by an equal amount the savings present in the private sector, which finds itself more easily forced to resort to “debt” (private in this case) to sustain exchanges and investments within the economic system.

Moreover, in countries like Italy, where economic policies aligned with Dalio’s thinking have been applied for decades, private indebtedness is extremely high when it also includes debts to the tax authorities—effectively originating from governments’ failure to run the necessary deficits to satisfy Italians’ savings desires and also enable them to pay taxes. State surpluses generated by oppressive taxation and a consecutive series of primary surpluses unparalleled in world history, combined with fiscal policies exclusively supporting elite rentiers, have effectively compromised the entire economic system of the belpaese, generating an enormous loss of that widespread prosperity achieved through expansionary spending policies implemented from the end of World War II through the 1980s and ‘90s.

Xu Gao’s Devastating Critique

Strong support for the pro-Dalio view within Chinese public opinion suffered a sharp setback following the recent publication of a 9,000-word essay titled “Where Are the Errors in Dalio’s Understanding of National Debt,” authored by the Bank of China International’s chief economist.

Xu Gao proves highly critical in his assessment of Dalio’s debt cycle thesis, accusing the hedge fund legend of “inability to recognize his own ignorance regarding macroeconomics” and “misapplication of macroeconomic analytical methods.”

The issue of Chinese debt is not new to debate. Back in 2023, Xu Gao and Zhao Yanqing of Xiamen University—along with many other Chinese economists positioned on both sides of fiscal policy matters—participated in an extended online debate with Zhao Jian, a renowned macroeconomist and director of the Xijing Research Institute, regarding China’s debt levels.

Xu identifies two main reasons why Dalio fails to understand macroeconomics, both traceable to what MMT has always maintained:

Microeconomic Principles Don’t Apply to Currency-Sovereign Nations

Xu’s first argument holds that Dalio made the mistake of using intuitive microeconomic approaches—applicable to individuals and companies—to address the economic challenges of sovereign nation-states. As I emphasized above, Xu clearly states how the debt of nations with monetary sovereignty fundamentally differs from the debt of individuals and businesses that depend on external cash flows.

“At the microeconomic level, the debt of individuals or companies is quite easy to understand and fundamentally intuitive,” Xu writes. “Their cash flows must be able to cover payment of principal and interest on their debt at any time to be sustainable. Otherwise, these individuals or companies will default on their debts.”

“If we shift the object of analysis to the debt of macroeconomic entities (nations), the microeconomic approach is no longer applicable.” The fundamental distinction for Xu is that nation-states possess central banks or monetary authorities capable of creating money ex nihilo.

“The government has the right to issue its own sovereign currency,” he writes.

“The government can always use currency creation to repay debt in its own currency and will never reach the point of declaring default on such debt. In theoretical terms, if it desires cash flows in its own currency, it can simply print them.”

“The cash flow of individuals and companies is largely exogenous in supply, while a government’s cash flows are endogenous.”

Xu also references exceptions that prove the rule: the 1997 Asian financial crisis and, more recently, the European sovereign debt crisis that extended from 2009 to 2018. Both were generated precisely by respective governments’ failure to fully exercise their monetary sovereignty, limiting themselves in achieving the necessary deficits to stabilize their economic systems in terms of employment and consumption.

“Macroeconomics Is Not a Machine”

Xu maintains that Dalio’s second cardinal error lies in his conception of macroeconomics as a mechanical entity governed by invariable laws. “Dalio mistakenly imagines macroeconomics as a machine,” Xu writes. “In 2008, Dalio wrote ‘How the Economic Machine Works.’ The first line of the book reads ‘the economy is like a machine.’ Even ‘Why Nations Fail’ from 2025 uses this concept in the first section of the first chapter. Consequently, he is unable to see the differences in macroeconomic logic under different macroeconomic conditions.”

According to Xu, “the mechanistic research method that considers macroeconomics as a machine has long been proven false and is a methodology abandoned by economists over half a century ago.” He specifically cites the fate of the Phillips Curve, proposed in 1958, which postulates an inverse correlation between inflation and unemployment rates.

The Phillips Curve emerged as an “iron law” of macroeconomics in the 1970s when it came to guiding key policy decisions in major economies. It was precisely at this juncture that the phenomenon of stagflation overturned the Phillips Curve’s assumptions, simultaneously producing high inflation and high unemployment.

“The disappearance of the Phillips Curve stimulated the rational expectations revolution in macroeconomics in the 1970s, leading macroeconomists to completely abandon their mechanistic view of the economy,” Xu writes.

The lesson for those seeking to understand macroeconomics was this: absolutely do not think of macroeconomics as a machine. “Macroeconomics presents various cause-and-effect relationships and contrasting behavioral forms, each of which can change due to changes in the macroeconomy itself. This machine is strange because it is alive: it has expectations about the future and is composed of people whose behavior will change as their expectations vary.”

“Nations can accumulate debt indefinitely without fear of crises,” since macroeconomics is not a machine subject to fixed and immutable laws—Xu asserts—maintaining that the same set of policies can have different outcomes depending on different macroeconomic conditions.

MMT Principles Applied to China’s Current Situation

It is for this reason that Xu believes national economies can engage in debt-fueled spending almost indefinitely under the right circumstances, without fear of inflation or financial crisis.

The concept directly echoes what MMT maintains: that real resources (starting with human resources) represent the potential limit that states’ deficit spending might encounter. And the connection with Mosler’s thinking and that of MMT economists arrives when Xu directly criticizes Dalio’s and mainstream economists’ belief that currency printing by governments with central bank support to address a debt crisis will inevitably lead to currency depreciation.

“Whether or not inflationary outcomes occur on currencies will depend on macroeconomic conditions,” which directly depend on the quality of spending that governments have undertaken and/or intend to undertake.

According to Xu, the conditions that allow currency issuance without risk of inflation or financial crisis are:

1. inadequate domestic demand and

2. excess productive capacity.

He adds that “both these conditions currently characterize the Chinese economy.”

Truth be told, both are conditions that also characterize the economies of EU member countries, but unlike China, we Europeans are governed by those addicted to neoliberal ideas that also characterize Ray Dalio’s thinking.

“When domestic demand is inadequate, increasing the money supply will not cause inflation; rather, it will help ease deflationary pressure and will not trigger macroeconomic instability,” Xu writes. Under such circumstances, Xu believes “the government can use money creation to repay domestic debt denominated in national currency” without worrying about runaway inflation.

Xu maintains that the fundamental condition limiting a nation’s debt levels is not its cash flows but its productive capacities—a concept fully aligned with MMT’s indications of full employment and total resource utilization.

Allow me a note regarding Xu’s concept concerning money creation to repay public debt. Here, it appears Xu needs to take one more step forward in understanding monetary operations and, particularly, the accounting that occurs between the Treasury and its central bank. When the former proceeds to issue government securities, no aggregate monetary creation occurs, but only a movement of money (numbers) within the central bank, from a reserve account to a deposit account. The same applies in the reverse case, when central institutions monetize securities by purchasing them from private parties. Net money creation within the economic system, as explained many times, occurs only and exclusively through government spending, and the private sector’s purchase of securities occurs with reserves previously created by it.

What makes me happiest reading Xu’s essay—and I’m certain will also delight Warren Mosler and the rest of the MMT economists and activists worldwide—is the acknowledgment that his convictions derive from Modern Monetary Theory thinking, which recently rose to prominence in Chinese economic circles, thanks in part to economists particularly close to it, such as Professor Yan Liang.

MMT made its debut in China in early 2020, when it was considered an intriguing heterodox school of economics, but unlike Dalio’s widely accepted views, MMT was criticized by nearly all Chinese economists who shared traditional economic views, identifying it rather simplistically with “debt monetization.”

Xu Gao, supported by MMT, concludes that China can engage in debt-fueled fiscal spending (in deficit) under its current macroeconomic conditions without fearing negative consequences in the form of inflation or debt crisis.

China’s Current Economic Conditions

China currently presents all conditions favoring worry-free fiscal spending, including:

• Inadequate domestic demand

• Excess productive capacity

• Low inflation

Beijing’s principal policymakers have explicitly indicated each of these conditions as the main challenges the Chinese economy currently faces. And unlike what happens in our countries, where the government constantly reduces Italian families’ spending capacity, Beijing has launched a “cash-for-clunkers” campaign to subsidize Chinese household consumption, aiming to stimulate domestic demand.

Chinese officials have also expressed concern about continued deflationary pressure stemming from the imbalance between demand and supply. This problem will certainly widen with the arrival of the Trump administration tariffs, requiring even more support for domestic consumption through even more expansionary fiscal policies.

The Producer Price Index (PPI) has remained in negative territory throughout much of 2025, while the Consumer Price Index (CPI) has shown only modest positive growth. For this reason, Xu vehemently maintains that China must increase debt-fueled spending, contrary to Dalio’s macroeconomic prescription of “beautiful deleveraging.”

China’s Aggressive Fiscal Response

At least for now, Chinese economic leaders appear aligned with deficit proponents who have found comfort in MMT. To finance the ambitious stimulus plans of 2025, Beijing policymakers have raised the official deficit-to-GDP ratio to 4%, a one-percentage-point increase from 2024.

Four percent represents the highest level ever recorded and a serious violation of this century’s longstanding convention that China must maintain its deficit-to-GDP ratio at the 3% benchmark established by the Maastricht Treaty.

For my readers, a deficit of only 4%, close to European parameters, might seem contradictory to what has been presented so far, unless one accounts for the fact that China’s official deficit-to-GDP ratio falls well below the total public deficit, as it excludes major forms of borrowing.

Among these, the main ones are special Treasury bonds issued by Beijing and special-purpose bonds issued by regional authorities. These are excluded from China’s “narrow deficit” as they are designated for investments in projects that generate cash flows or have assets as collateral.

The projected “broad deficit”—which includes special Treasury bonds and special-purpose local government bonds—will approach 10% in 2025.

“The enormous scale of public spending and debt arrangements has exceeded market expectations,” wrote Lian Ping, a professor at East China Normal University. “This demonstrates strong determination to accelerate the recovery of demand this year and achieve 5% economic growth.” Lian himself predicts that Beijing will maintain an accommodative fiscal and monetary policy at least through 2035.

China’s long-term economic objective, Lian further writes, is to achieve per capita income equivalent to that of a moderately developed nation by 2035. This means maintaining annual GDP growth around 5% for the next decade. And maintaining GDP growth around 5% will require adopting strong macroeconomic policy easing.

Conclusion: A Warning to Europe

Europe and its leaders are hereby warned!

The contrast between China’s embrace of MMT principles and Europe’s continued adherence to neoliberal austerity frameworks could not be starker. As we move through the final quarter of 2025, the outcomes of these divergent approaches become increasingly visible. While China deploys aggressive fiscal stimulus to maintain growth and employment, European nations remain trapped in self-imposed fiscal constraints that continue to undermine economic prosperity and social welfare.

The question is no longer whether MMT principles work—China is providing the proof in real-time. The question is how long Europe will persist with failed orthodoxies before confronting the reality that monetary sovereignty, properly understood and deployed, offers the path to genuine economic security and shared prosperity.

Original source: Il capo economista della Bank of China utilizza il pensiero della MMT nel suo feroce attacco al “falco” del debito Ray Dalio