MNI INTERVIEW: PBOC Can Use QE Strategically If Necessary - Yu

The People’s Bank of China should increase its purchase of treasury bonds to support an expansionary fiscal stance, as the country struggles with insufficient demand which makes monetary easing measures grow less effective, a former PBOC advisor told MNI in an interview.

“Chinese-style quantitative easing” – large-scale Chinese government-bond issuance coordinated with central bank secondary market bond trading – will help stimulate infrastructure investment should the property market continue to decline, and consumption and net exports remain less supportive of the economy meeting Beijing’s 5% GDP growth target, said Yu Yongding, former member of the PBOC’s monetary policy committee.

“Monetary financing is not an absolute red line that cannot be crossed and fiscal deficits are not absolutely forbidden from being monetised,” he stressed.

Yu, now an emeritus academician at the Chinese Academy of Social Sciences, has called for greater fiscal expansion to solve the soft demand issue in recent years, insisting Beijing has significant room to raise debt because of its high saving, and still relatively high GDP growth rate. (See MNI INTERVIEW: China Eyes Significant Special Treasury Issuance)

Using CGBs as an anchor for monetary base injections will improve transparency and standardisation of the PBOC’s operations, promote the government bond, capital and interbank money markets, and help develop a yield curve, he argued. “In short, it should be a welcoming move," he added.

However, the PBOC’s purchase plan will encounter lots of technical issues, for example, the amount of CGBs held by commercial banks and their tenors may fail to fit the need of the PBOC’s policy objectives, the economist explained.

The expansion of the central bank's purchase programme will be “a rather complicated and gradual process,” he continued.

MNI reported Wednesday the PBOC aimed to start secondary market CGB trading to support issuance of ultra-long special treasuries. (See MNI: PBOC Eyes Secondary CGB Trading To Support Issuance)

POLICY DILEMMA

Monetary policy alone can hardly stimulate demand and drive economic growth during a quasi-deflation and liquidity trap scenario, Yu argued.

While China must cut interest rates further, the PBOC lacks room to ease due to various domestic and international factors, such as commercial bank's narrowed interest margin, the lack of high-quality loan projects, and low appetite for credit among companies, he said.

Therefore, despite multiple reserve requirement ratio cuts, China’s commercial banks have maintained excess reserves at a relatively high level in the central bank, he added.

In this situation, Beijing must increase fiscal spending to improve infrastructure and public services, and stimulate household consumption, Yu suggested. While fiscal stimulus leads the way, an eased monetary-policy stance can help create a favourable financing environment, he said.

The issuance of up to CNY9 trillion in planned central and local-government bonds warranted close attention as it may lead to a rise in yields, he noted, suggesting authorities should consider introducing QE "with Chinese characteristics" should the market demand for government bonds prove soft.

DEBT FINANCING

Chinese officials and academics have warned fiscal discipline could be at risk should the PBOC purchase government debt and that monetary financing may exacerbate inflation and stoke asset price bubbles.

Yu argued authorities should seize the opportunity to strengthen countercyclical policies to curb economic decline while the inflation rate remains low and room exists for policy stimulus.

“We should not rule out the possibility of using extraordinary measures during extraordinary times from the outset,” Yu continued, noting China may not have reached the point where monetary financing or fiscal deficit monetisation is necessary considering the high savings rate among residents and still strong public demand for government bonds.