Open Clash between PBOC and MOF over Chinese Fiscal Policy Continues

The head of the Chinese central bank’s research department has launched further criticism of China’s fiscal policies after triggering a rare round of open debate on the issue in July.

On 8 August Xu Zhong (徐忠), the head of the People’s Bank of China’s research department, published an essay stating that monetary policy had been forced to compensate for the deficiencies of fiscal policy.

In Xu’s analysis monetary policy is an aggregate volume adjustment tool which should focus on adjustments to short-term aggregate demand, as opposed to structural adjustments.

For this reason any adjustments to the economic structure should “primarily employ fiscal policy and make supplementary use of monetary policy.”

In actual practice, however, Xu says that a shift in government function is still lagging, which has led to insufficient investment by the Ministry of Finance (MOF) in areas such as education, healthcare, social welfare, independent innovation, energy conservation and environmental protection.

Xu’s essay also highlighted other problems, such as failure to fully resolve outstanding historical debt and a continued sizeable short-fall in capital, leaving monetary policy with no other option but to bear some of the responsibility for structural adjustment, which has impacted the overall effects of macro-adjustment efforts.

From a regulatory viewpoint Xu said that MOF is currently the holder of China’s state-owned financial assets, helping to protect and boost they value by acting as the government’s capital contributor to and shareholder in financial institutions.

MOF is also a public regulator, however, creating conflicts and confusion given its aforementioned role.

The publication of Xu’s essay arrives just after he made frank criticisms of China’s fiscal policy in July, triggering a rare example of open debate between representatives of PBOC and MOF.

Xu said that China’s fiscal policy settings were insufficient and failing to fulfil their proper “countercyclical function” of boosting growth.

His remarks triggered reproach from a MOF official, who sought to refute the claims in a pseudonymous essay published by leading financial news publication Caixin.

Xu also said that it would only be possible to provide a suitable environment for supply-side structural reforms and high-quality growth by firmly maintaing a stable, neutral monetary policy.

The PBOC research chief pointed to the need to place less emphasis on M2 money supply and total social financing indices in order to reduce China’s long-term preoccupation with GDP growth targets, and achieve an effective transition from quantity-centric growth to quality-centric growth.

During the high-quality growth phase, Xu said that monetary policy needed to prevent aggregate demand from sliding too rapidly in the short-term, as well as prevent “watering” from creating entrenched structural distortions and driving debt and leverage higher.

Given existing problems with China’s financial markets, Xu pointed to the need for ongoing use of qualitative monetary policy adjustment methods and a strengthening of macro-prudential controls during the process of shifting towards price-based adjustments, in order to ensure the stability of the finance system.

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