Debate in China on quantitative easing heats up as growth slows
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A debate over whether China’s central bank should directly bankroll state spending is flaring up among bureaucrats and economists in Beijing as the Chinese government is under growing pressure to find new ways to arrest a deepening economic slowdown.
The debate was initiated by a middle-ranking official at China’s Ministry of Finance, who argued in a speech at a bond forum last week that the People’s Bank of China (PBOC) should use treasury bonds as a major monetary policy tool and make the government bonds “quasi-money”.
Guo Fangming, the deputy director general of the finance ministry’s treasury department, said China would look into ways to link “treasury bond management and monetary policy”, a suggestion that would blur the lines between monetary and fiscal policies to produce a China-style quantitative easing policy.
While there is no evidence that the Chinese leadership will endorse his idea and it is technically illegal in China for the central bank to bankroll state spending directly, Guo’s suggestion reflects a looming crisis for the Chinese leadership – Beijing’s traditional way of pumping liquidity into the banking system is not working as effectively as expected to bolster economic activity.
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Xu Gao, an economist with Everbright Securities, wrote in a research note this week that the idea of asking the central bank to buy bonds, or even stocks, was a replica of the US Federal Reserve’s actions in 2002 under then-chairman Ben Bernanke.