PBOC Shouldn’t Buy Government Bonds Directly, Adviser Says
An adviser to China’s central bank dismissed the idea of direct monetary financing to aid government bond sales.
(Bloomberg) -- An adviser to China’s central bank dismissed the idea of direct monetary financing to aid government bond sales, suggesting instead policy makers cut the amount of money commercial lenders hold as reserves to smooth the issuance.
The People’s Bank of China can cut banks’ reserve ratios or supply liquidity to targeted lenders to support them in purchasing government bonds, according to Ma Jun, a member of the PBOC’s monetary policy committee. Any proposals that the PBOC should buy government debt directly would, in essence, be asking the central bank to “print money” to finance fiscal deficit, he wrote in a newspaper article.
Monetary financing “will have long-term impact on the macro economy, fiscal sustainability and financial stability,” Ma wrote in the central bank’s Financial News newspaper. Doing so would mean “giving up the last line of defense on government fiscal behavior,” he said.
Monetary financing could cause hyperinflation, asset bubbles, currency weakening, over-borrowing and lower productivity, Ma said.
Fiscal researchers with links to China’s Ministry of Finance had previously suggested the central bank directly buy some government debt this year, which could help reduce the impact on markets caused by larger bond sales.
The government has pledged to increase the fiscal deficit as a share of economic output and sell more special-purpose government debt to help finance the spending increase as they work to reopen the virus-weakened economy.
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With assistance from Bloomberg
