PBOC Says China’s Fiscal System Reason Behind Its Leverage Woes


The head of research for the Chinese central bank has imputed China’s leverage-related risk to problems with the country’s fiscal and taxation system, and said that policymakers cannot depend rely excessively upon monetary policy.

Xu Zhong (徐忠), head of the People’s Bank of China research department, made the remarks during a speech he delivered at the 2018 Institute of International Finance Summit.

“The root cause of China’s high-leverage risk lies in the aftermath of reforms of the fiscal and taxation system…irrespective of whether it’s the hidden debt of government, the high leverage of state-owned enterprises or the rapid rise in household leverage in recent years, defects with the fiscal and taxation system are primary reason.

“The fiscal relationship between central and local [government] has never been smoothed out, the proper door for local government financing hasn’t been opened, and when province-level governments issue debt on behalf of municipal-level governments the rights and responsibilities don’t match.

“[This] spurs central government intervention, leading to implicit guarantees and moral hazard.”

In addition to calling for further reform of China’s fiscal and taxation system in order to expedite the country’s deleveraging campaign, Xu Zhong warned that the country cannot be over-reliant upon monetary policy.

“Monetary policy can’t do everything, especially under conditions where external shocks are constantly increasing, and room to manoeuvre is becoming even smaller.

“[Aggregate monetary policy] is very likely to use liquidity to conceal credit risk, and low interest rates to conceal low investment returns…this is not certain to be effective with respect to structural issues, and could also add fire to the flame.

“The biggest role of monetary police is to maintain a stable and neutral monetary environment. With regard to resolving structure problems, we can only resort to supply-side structural reforms.

“Additionally, we must strictly control the growth of shadow banking, gradually resolve [outstanding liabilities,] and can use securitisation as well as financial institution capital supplementation to return operations back to balance sheets, and maintain and increase the level of support and service for the real economy.”

Xu also called for Chinese regulators to make further improvements to the country’s business environment.

“China’s business environment is ranked just 78th out of 190 countries around the world, while it’s ranked 93 in terms of easing of starting a business, 172nd in terms of construction permits, and 130th in terms of tax collection.

“During the period from 2013 to 2016, the global ranking of China’s business environment rose 18 places, with ease of starting a business rising 31 places.

“This obviously does not match [China’s] status as the country with the world’s second largest GDP, and especially now and in future, under conditions where we face external shocks, there is greater need to expand reforms for the delegation of regulation and services, advance state-owned enterprise preforms, and make efforts to improve the business environment.”