Resolving Government’s Structural Deficit––– 2. Imposition of Inheritance Tax to Widen Tax Base

Background and IntroductionChina overhauled its policy of pegging RMB to USD in 2005, which makes RMB peg to a basket of currencies according to trade share. However, the majority of weighting still goes to USD. It means the valuation of RMB is mostly determined by movement in USD, which raises the question of over-reliance oBefore we get into the idea of pegging RMB with a Basket of Commodities, we should assess the most intuitive solution, which is the de-peg everything and make the RMB a fiat currency just like the USD or Euro. The fiat currencies have several problems that make it an inferior alternative to pegging Hence, should the Chinese government intend to lift the capital flow restriction or reduce the reliance on USD, we need to find alternatives to the fiat money choice. And pegging RMB with a basket of commodities, a creative and sensible proposition by Steven N.S. Cheung, is worth considering.ImplementationFirst, choose a basket of 20-40 commodities such as crude oil, corn, grain, soybean, wheat, cotton, and more. Second, make each individual commodities chosen a RMB-denominated futures market. Third, make an index of commodities weighed by the trading value of each commodities in the beginning of a yAdvantages of Pegging RMB with a Basket of Commodities1.The government does not need to hold the basket of commodities physically (unlike other pegs like Hong Kong’s peg to USD, which needs to accumulate a USD currency reserve to defend the peg), as trading on the futures market is sufficient in defending the peg.2.It releases the reliance on USD and other major currencies like Euro, JPY, and other G10 currencies. RMB can finally compete with the major currencies, mostly the USD. There is every chance that other smaller economy can peg with the RMB, since it has something concrete (commodities), unlike othe3.Interest rate will be fully determined by the market, as the government no longer needs it to implement monetary policies. As interest rate is an important price (of capital), handing it back to the market to determine will be the best practice. Fiat money needs to adjust the interest rate time t4.Foreign Reserve will no longer be needed. This means the close to USD3 trillion foreign reserve can be gradually sold in the market, releasing a huge amount of capital for the market or state-owned enterprises.5.China will be ready for lifting the capital inflow and outflow restriction, as the peg to a basket of commodities is difficult to speculate or launch vicious campaign on. As the basket of commodities is denominated in denominated in RMB, which means China can simply print money to finance the defRole of Hong Kong and CNHAs such reform in RMB or CNY markets are too risky and large to implement. It is best to experiment the policy with a smaller offshore RMB currencies Therefore, It is where Hong Kong can step in as the largest trading center of the offshore RMB currency of CNH. The Central Government can simply moniIt will be a showcase of how Hong Kong can help China’s development under One-Country- Two- Systems.