Coronavirus: China’s central bank, finance ministry at odds over funding for economic recovery

Finance Ministry official calls for central bank to purchase bonds directly from the government, breaking a long-standing taboo

But the People’s Bank of China warns relaxing rules could erode fiscal discipline and spending efficiency

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Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, sparked debate among policymakers after suggesting the central bank buy bonds directly from the government.

Published: 7:43pm, 6 May 2020Updated: 7:43pm, 6 May 2020

China’s top economic policymakers have been engaged in heated debate over whether the country’s central bank should directly buy special bonds issued by the finance ministry to help the government’s economic support measures.

The discord reflects the differing schools of thought in China over how best to help the world’s second largest economy recover from the coronavirus.

The National People’s Congress (NPC), which is due to meet in less than three weeks, is expected to provide clearer signals on Beijing’s economic policy.

Liu Shangxi, president of the Chinese Academy of Fiscal Sciences, a finance ministry-affiliated think tank, kicked off the debate after he recently proposed issuing 5 trillion yuan (US$700.5 billion) in special Treasury bonds to help stabilise the economy.

He called on the People’s Bank of China (PBOC) to buy them in tranches at an interest rate of zero.

Such purchases of bonds are technically taboo in China as central bank law forbids it from directly bankrolling government spending.

The “monetary financing” of government fiscal plans means the central bank is creating additional money supply to buy the debt, which could lead to higher inflation.