China Resists Unlimited Asset Purchases: "US-Style Quantitative Easing Won't Work"

Former Chairman Xiao Gang of the China Securities Regulatory Commission giving a speech. Photo by Zhongguo Caifu Wang

[Asia Economy Beijing=Special Correspondent Park Sun-mi] The Chinese government is facing a flood of opinions that while liquidity should be eased, it should not adopt the unlimited quantitative easing method chosen by some advanced countries such as the United States. Ahead of the largest political event in China, the Two Sessions (Lianghui: the National People's Congress and the Chinese People's Political Consultative Conference) opening in Beijing on the 21st, the Chinese government’s dilemma over deciding how to stimulate the economy is deepening.

According to Chinese economic media Caifu on the 18th, Xiao Gang, a CPPCC member and former chairman of the China Securities Regulatory Commission (CSRC), attended the 2020 Tsinghua World Financial Forum held over the weekend and stated, "China must resist quantitative easing where the People's Bank of China (PBOC) purchases assets unlimitedly and floods the market with money to revive the economy. The Chinese economy is not at the stage to start an unlimited quantitative easing policy now."

He explained, "(Quantitative easing) is far from necessary. Rather, the next step should be to increase the fiscal deficit ratio relative to GDP, issue special national bonds at the central government level, and increase the issuance of special-purpose bonds by local governments." He added, "These measures can respond quickly and effectively to the impact of COVID-19 on the Chinese economy and employment market."

Xiao’s opposition to quantitative easing follows the PBOC’s deletion of the phrase 'd? sh? m?n gu?n' (meaning quantitative easing) from its first-quarter monetary policy report, and Liu Xiangxi, director of the China Academy of Fiscal Sciences under the Ministry of Finance, proposing that "the PBOC should consider directly purchasing new government bonds from the Ministry of Finance in the form of quantitative easing." Within China, concerns are growing that the PBOC might follow the U.S. style of quantitative easing by engaging in unlimited asset purchases.

Zhou Xiaochuan, former governor of the PBOC and chairman of the China Finance Society, also attended the same forum as Xiao and warned, "Quantitative easing may cause some side effects in the future. Some 'free riders' may emerge in the market." Additionally, Ma Jun, a member of the PBOC’s monetary policy committee, wrote in a local Chinese media article the day before, "The PBOC should avoid directly purchasing special treasury bonds," pointing out that "such moves could increase inflation risks, create asset bubbles, and lead to yuan depreciation," supporting the views of Xiao and Zhou.

Committee member Ma expressed concerns that "if the PBOC directly participates in quantitative easing programs, it could encourage excessive fiscal debt and trigger a crisis of confidence in government-issued bonds in international markets. The credit rating of Chinese government bonds could be downgraded, and financing costs could rise." He added, "Despite the economic impact of COVID-19, China is maintaining positive interest rates, and traditional monetary policy tools still have room for use. The Chinese economy could recover starting from the second quarter," expressing optimism.

The Hong Kong South China Morning Post (SCMP) interpreted that these voices, which are optimistic about the Chinese economy and urge restraint on quantitative easing, likely reflect the general atmosphere within the Chinese State Council at present. However, as specific details regarding policies to revive the economy hit by COVID-19 may be announced at the National People's Congress on the 22nd, the debate over quantitative easing within China is expected to continue until the Two Sessions.

This content was produced with the assistance of AI translation services.