China's central bank advised to avoid risky bond buying as economy improves

Tuesday 19 May 2020 10:02 CET | News

The People’s Bank of China should avoid buying special treasury bonds as such a move could fuel inflation risks and asset bubbles and lead to depreciation of the yuan currency.

This advice was highlighted by central bank policy adviser Ma Jun, after heated debate among economists and advisers over whether the central bank should monetise its fiscal deficit through quantitative easing, amid the current pandemics.

The reasoning behind his advice is that the economic recovery momentum has been quite obvious since the second quarter, and fiscal revenue and expenditure will gradually improve, although the epidemic has caused a short-term impact on China’s economy and fiscal revenue and expenditure.

Top leaders have pledged to raise the annual budget deficit ratio, issue more local government special bonds and what would be the first special treasury bonds since 2007 in order to help spur economic growth, but few details have been made public, according to Reuters.

If the central bank is forced to provide large-scale financing for the deficit, it would lead to depreciation of the yuan and inflation risks or asset bubbles, especially in real estate. China’s credit rating could also suffer if the deficit monetisation’ mechanism is established, which could encourage excessive government borrowings.

Nevertheless, Chinese law still bans the central bank from buying government bonds.
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Keywords: People’s Bank of China, bonds, pandemics, banking, finance, China, central bank
Categories: Banking & Fintech
Countries: China
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Banking & Fintech