PBoC will not engage in monetary financing, Guo says

China’s central bank will not monetise fiscal deficits or adopt negative interest rates to respond to the coronavirus pandemic, according to Guo Shuqing, who serves as the institution’s senior Communist Party official.

China will not flood the market with liquidity or use monetary financing to respond to the coronavirus pandemic, Guo told a forum in Shanghai via a video link on June 18.

Guo is deputy governor of the People’s Bank of China and is the secretary of the PBoC’s Communist Party committee. He also serves as the chairman of China’s banking watchdog, China Banking and Insurance Regulatory Commission (CBIRC).

Economists from a think-tank close to some senior figures in the Chinese government argued recently that the PBoC should buy government bonds directly to support fiscal stimulus. China’s authorities plan to sell 1 trillion yuan ($141.26 billion) of special treasury bonds to boost the economy. China’s economy shrank 6.8% year-on-year in the first quarter this year, the sharpest contraction in nearly four decades.

The effects of China’s unprecedented stimulus are significant, but the marginal impacts are decreasing, Guo added. “There is no free lunch,” he told the forum. “Policy-makers should leave room for the future as the coronavirus will stay with us for a while.”

Chinese authorities aim to improve capital markets to facilitate the issuance and trading of special treasury bonds, instead of flooding the market with liquidity, Guo said. The issuance of the bonds will begin in late June, with maturities ranging from five to 10 years.

The central bank and the State Administration of Foreign Exchange scrapped quota restrictions on two major inbound investment systems in May. The move aims to make it easier for offshore investors to enter the country’s stock and bond markets.

Aggressive and continuous monetary easing would increase inflation risks, Guo argued. Inflationary pressures remain low at the moment, but upside risks might emerge as global supply chains take time to recover, he warned. Guo said that the massive domestic stimulus in the US might harm the credibility of its sovereign debt and of the dollar.

He was speaking to the Lujiazui Forum in Shanghai by video link from Beijing, as residents in the city were told to stop travelling after a a spike of Covid-19 cases this week.

New loans issued in China are likely to hit nearly 20 trillion yuan by the end of this year, PBoC governor Yi Gang said at the same forum. That figure would exceed the previous record high of 16.8 trillion yuan in 2019.

As economies reopen and states plan recovery, central banks and policy-makers should consider timely withdrawal of easing measures, Guo said.

Yi echoed Guo’s suggestion. The central bank chief said economies should make exit plans for their easing monetary polices in advance, while maintaining a proper level of support for economic recovery.

Central banks should be careful about the possible adverse effects of accommodative monetary policies, Yi said via a video link.

PBoC resumes reverse repo operations

The PBoC also resumed 14-day reverse repo operations on June 17 for the first time since February. It injected 70 billion yuan through the liquidity tool and another 50 billion yuan via seven-day reverse repo. It reduced the interest rate on 14-day reverse repo instruments to 2.35%, 20 basis points lower than in the last operation.

The move aims to maintain ample liquidity in the financial system to facilitate the Chinese authorities’ issuance of special treasury bonds, analysts say.

The PBoC’s balance sheet has been stable – some 36 trillion yuan – over the past few years, while central banks in other major economies swelled during the past few months as a result of unprecedented monetary easing, Yi said at the forum.

Money and credit supplies in China have increased significantly after the massive market shock earlier this year, due to easing measures and an improved transmission mechanism, Yi said. The PBoC has delivered a total of 10 reserve requirement ratio cuts since 2018, releasing 8 trillion yuan to the financial system, he added.

China’s outstanding total social financing stood at 265 trillion yuan at the end of April, up 12% from a year earlier, according to PBoC data released in May. 

While cuts in reserve requirements shrank the PBoC’s balance sheet, the central bank is expanding its assets through measures such as refinancing and rediscounting, Yi said.