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UPDATE 1-Central bank head says China must not monetize deficit - state media

(Adds details, quotes)

BEIJING, Nov 30 (Reuters) - China must not monetize its fiscal deficit and should build a “firewall” between fiscal and central bank funds to ward off risks, central bank governor Yi Gang was cited as saying by the official Shanghai Securities News on Monday.

A virus-induced slump in China’s economy earlier this year sparked a debate among Chinese economists over whether the central bank should monetize the fiscal deficit by buying government bonds, also known as quantitative easing.

“We must implement an independent financial budget management system of the central bank and prevent the monetization of fiscal deficit,” Yi was quoted as saying.

China should build a “firewall” between fiscal and central bank funds to prevent the central bank taking on enterprises’ credit risks, Yi said.

The People’s Bank of China (PBOC) cannot buy government bonds on the primary market, but is permitted to do so on the secondary market.

Yi, commenting on China’s 14th Five-Year Plan, said the central bank would enrich its monetary policy toolkit, and deepen interest rate reforms to help improve policy transmission to better support the real economy.

The central bank also plans to push forward research and development on digital currency and gradually include key financial activities, institutions, markets and infrastructure in macroprudential management, according to the report. (Reporting by Kevin Yao; writing by Tom Daly; Editing by Kevin Liffey)

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