QE or not QE? China's central bank grapples with policy dilemma

BEIJING (Reuters) - China’s plans to step up stimulus support for the virus-ravaged economy have promoted a heated debate among economists and advisers over whether the central bank should monetize its fiscal deficit through quantitative easing.

FILE PHOTO: A man wearing a mask walks past the headquarters of the People's Bank of China, the central bank, in Beijing, China, as the country is hit by an outbreak of the new coronavirus, February 3, 2020. REUTERS/Jason Lee/File Photo

China’s annual parliament meeting, due to open on Friday, is expected to unveil stimulus plans to revive the world’s second-largest economy, putting the People’s Bank of China (PBOC) in the spotlight and leading to questions whether it should finance an expected surge in government bonds.

Unusually, this debate is being held in public, pointing to differences within China’s policymaking circles.

Liu Shangxi, head of the Chinese Academy of Fiscal Sciences (CAFS), the finance ministry’s think tank, has been leading calls for allowing the PBOC to directly buy special bonds of up to 5 trillion yuan ($703 billion), at zero interest.

Liu has said direct central bank buying of such bonds - or quantitative easing - could avoid the crowding out effect on financial markets and also help boost money supply, and he played down the risk of hyperinflation.

Liu’s proposal has been challenged by Ma Jun, an adviser to the central bank, and several government economists.

Ma wrote in the official Finance News on Sunday that the PBOC should avoid buying treasury bonds as such a move could fuel inflation, create asset bubbles and hit the yuan.

Zhang Ming at the Chinese Academy of Social Sciences, a top state think tank, has called Liu’s proposal a “very wrong idea”.

Liu told Reuters that he believed China should take forceful policy measures to cope with the unprecedented impact of the coronavirus pandemic.

“This is my personal proposal. Whether it could be adopted is up to the government to decide,” Liu said.

“How to coordinate fiscal and monetary policy within a new framework is something that all countries are exploring. China should also explore based on its own conditions.”

Chinese law bans the central bank from buying government bonds, but Liu suggested a revision to make it happen.

A senior finance ministry official told Reuters that Liu’s views do not represent that of the ministry.


The PBOC is likely to avoid quantitative easing for fear of fanning inflation and debt risks, but it will play a key role in the fiscal stimulus, possibly by funding bond purchases by big banks, government economists and advisers said.

The PBOC is reluctant to flood the economy with easy cash due to lessons from the 2008-09 global crisis, despite the dropping of a long-standing vow to refrain from “flood-like stimulus” in its latest policy report, they said.

“If we allow the PBOC to buy treasury bonds directly, it will be an extraordinary quantitative easing,” said Jia Kang, head of China Academy of New Supply-side Economics, a think tank.

“China is still relatively far off from this step (QE), unlike the United States, Europe and Japan, where monetary policy has been exhausted.”

Analysts have said any upcoming fiscal stimulus, which is likely to be announced at the parliament meeting, could amount to 5-6 trillion yuan, or 5-6% of GDP.

The government has 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.

Local bonds will be mainly used to fund infrastructure projects while special treasury bonds could be used to support firms and regions hit hard by the outbreak, for subsidies to spur consumption, or for boosting capital of small banks.

“We haven’t reached a stage where people don’t buy treasury bonds and the central bank must buy them directly,” Yu Yongding, an influential economist and former central bank adviser, told Reuters.

“The key is to boost economic growth via forceful stimulus measures. We should mainly rely on fiscal policy, while monetary policy should coordinate with fiscal policy,” he said.

While the PBOC could refrain from buying treasury bonds, it could provide funding to support the bond issuance, which could be bought by commercial banks, policy sources said.

“We need special policy at a special time. Big banks could buy the bonds, but the PBOC will provide liquidity,” said a government adviser who is involved in policy discussions.

Analysts at Nomura said they expected the finance ministry to issue special bonds to some large state banks first, with the PBOC then immediately purchasing these bonds from those banks. Such a move is allowed under law.

(This story fixes typo in paragraph 16)

Reporting by Kevin Yao; Editing by Raju Gopalakrishnan