The recent announcement of China’s central bank’s participation in treasury-bond trading in the secondary market has sparked discussions and raised concerns. This move has led to apprehensions about Beijing’s leaning towards quantitative easing, prompting a prominent researcher associated with the Ministry of Finance to advocate for purchases in the primary market to foster better alignment of fiscal and monetary policies.
Liu Shangxi, the head of the Chinese Academy of Fiscal Sciences, which is affiliated with the Ministry of Finance, stressed the necessity to “free our minds” regarding operational constraints in both primary and secondary markets. According to him, this step is vital for achieving fiscal and financial coordination. In an exclusive academic meeting, Liu underscored the significance of this approach, highlighting that it would facilitate improved integration of finance in the monetary policy transmission mechanism.
It is noteworthy that the primary market is where new securities, such as stocks and bonds, are initially issued and sold, while the secondary market is where already issued securities are traded by investors. In April, both the finance ministry and the central bank issued separate statements indicating the potential utilization of treasury bond trading. However, Chinese law currently prohibits the central bank from directly purchasing treasury bonds to prevent debt monetization, a precautionary measure derived from the lessons learned during a period of high inflation in the 1980s.
Despite these restrictions, China has expressed its intention to amend the Law of The People’s Bank of China, although specific details of the revision are yet to be disclosed. Past instances, such as the central bank’s bond purchases in 1997 and its involvement in the establishment of the China Investment Corporation in 2007, have raised concerns about potential fiscal monetization. However, Liu’s proposal focuses on the necessity to challenge traditional notions about fiscal overdrafts and redefine the boundaries between primary and secondary markets.
Liu’s argument is rooted in the belief that a strict separation between these markets would hinder policy coordination between the two major economic entities. He has highlighted that similar operations have been undertaken through state-owned commercial banks in the past, blurring the lines between the primary and secondary markets. In this context, he suggested that it is imperative to liberalise the mind and re-evaluate these boundaries.
Additionally, Liu underscored that several overseas central banks have engaged in purchasing stocks or assets owned by businesses, emphasising that the unconventional nature of such policies varies depending on the circumstances and needs. He drew parallels with the evolution of the fiscal deficit from being avoided in the past to becoming a conventional tool today.
In conclusion, the proposal presented by Liu Shangxi reflects the ongoing discussions about the role of China’s central bank in treasury-bond purchases, focusing on the need to reconsider existing boundaries and explore new approaches to achieve fiscal and financial coordination. As these deliberations progress, it remains to be seen how China’s fiscal and monetary policies will evolve in the future.