Active Monetary Policy Needed To Avoid Liquidity Problems

China must carefully coordinate monetary and fiscal policy to avoid liquidity tightening in Q4 following the government’s decision to issue an additional CNY1 trillion in treasury bonds, according to Guan Tao, former director at China's State Administration of Foreign Exchange. Guan expects authorities to actively use quantitative and structural monetary tools, such as reserve requirement ratio cuts and open market operations, to alleviate funding pressure and maintain reasonable liquidity. Overall, Guan believes the new treasury bonds will alleviate local-government debt pressure while increasing expenditure intensity and boosting domestic aggregate demand.