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MNI (London)

The People's Bank of China should increase holdings of China Government Bonds to help fill out the yield curve and make the securities more liquid, a former member of the central bank's monetary policy committee and current advisor to the Ministry of Finance told MNI, adding that public borrowing should also be rebalanced toward more short-term debt.

The PBOC could accept more CGB as collateral against loans to banks via its relending facilities or open market operations, said Li Yang, chairman of the National Institution for Finance & Development at the Chinese Academy of Social Sciences. At the same time, the government may have to boost issuance of ultra-short-term and long-term debt to better populate the end of the curve, he said.

The PBOC's balance sheet currently lists CNY1.53 trillion in claims on the government, accounting for only 3.98% of its total CNY38.3 trillion in assets, which Li said was too little compared to other central banks' holdings of their sovereign bonds.

While completing the yield curve should help further liberalise the interest rate system, Li has also argued for China to further relax restrictions on capital flows and to permit greater flexibility in the exchange rate on the way to establishing the yuan as a true reserve currency and to encouraging more yuan pricing of commodities essential to Chinese industry.


A net exporter of capital for the past few years, China is large enough to withstand international movements of funds, Li said, adding that a possible hike in U.S. interest rates would not harm China and could even help it, by reducing yield differentials.

The PBOC should also factor in prices of assets such as equities, bonds, property and commodities into its policy framework, the award-winning economist suggested. Booming e-commerce has held down consumer price inflation in recent years, but producer prices have remained volatile, he said.

In the meantime, the economy still faces challenges from an unbalanced post-pandemic recovery, together with the danger that Covid-19 could spread again if Chinese borders are reopened, Li said, adding that the PBOC is likely to maintain interest rates unchanged so long as headwinds persist.

"We should not be overly optimistic about the (economic) situation and policymakers are also aware of the uncertainties, so macro policy has stressed that it will not make a sharp U-turn…It is not the time to talk about rates hike or reduction," he said.

While production has recovered fast thanks to stimulus aimed at small business, consumption has lagged and will only improve together with a stronger jobs market.


The date of reopening borders remains a big uncertainty, Li said. While vaccination efforts are accelerating in China, they still lag the U.S. pace and it is not clear either whether major countries will recognize each other's inoculations when deciding whom to allow to enter, he continued.

For the longer term, China still faces a gradual decline in growth as the population ages, and policymakers have to grapple with constrained innovation and increasing environmental controls. However, the country should be able to achieve a potential growth rate of about 5% annually over the next 15 years in the absence of unexpected major events such as a sharp deterioration in relations with the U.S. or another pandemic, Li said.

One of the biggest dangers China faces in case of further decoupling with the U.S. would be potential moves to delist Chinese companies from American stock markets, Li said. While China is not short of capital, U.S. listings help Chinese companies acquire expertise and technology, improve governance, and expand internationally, he said.

MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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