Central Bank Governor Warns against Deficit Monetisation, Calls for Improvements to Money Supply Adjustment Mechanisms

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People’s Bank of China (PBOC) governor Yi Gang (易纲) has warned against monetisation of the Chinese deficit in the wake of stimulus measures to keep the economy afloat during the COVID-19 pandemic.

Yi called for “implementing an independent central bank financial budget management system, and preventing the monetisation of the fiscal deficit,” as well as “erecting a ‘fire wall’ between the two ‘money bags’ of the fiscal system and the central bank.”

The PBOC governor made the remarks in an essay entitled “Establishing a Modern Central Banking System” (建设现代中央银行制度), that was recently published in a collection of texts on proposed targets for China’s 14th Five Year Plan.

The comments arrive following debate within senior Chinese policy circles over deficit monetisation, with some calling for amendment to the People’s Bank of China Law to allow the central bank to purchase sovereign bonds.

Under the current law PBOC is not permitted to directly subscribe for or underwrite Chinese treasuries or other government bonds, or provide the government with overdrafts.

“There is no need for the central bank to subscribe for treasuries,” said a source from the Chinese central bank to 21st Century Business Herald. “This is the baseline – otherwise there will be inflation or a worsening asset bubble.”

Yi also called for “achieving monetary stabilisation targets, employing market-based methods to adjust and control money creation in the banking system, and preventing the central bank balance sheet from bearing enterprise credit risk and eventually influencing trust in the renminbi.”

“[PBOC will] improve liquidity, capital and interest rate restraint mechanisms for adjusting the creation of money by banks.”

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