China’s central bank chief has said his institution will not bankroll government spending or bail out troubled companies backed by local governments, trumpeting independence when political pressures are mounting on the People’s Bank of China (PBOC) to resolve fiscal and financial risk. Yi Gang, who has led the bank since 2018, said a “firewall” must be set up between the treasury and the central bank, rejecting a notion that China could “monetise” fiscal deficits by printing money to directly bankroll fiscal spending. A key aide to Vice-Premier Liu He, Yi said the central bank’s balance sheet “must not assume corporate credit risks” as this would undermine the credibility of the currency, according to an article published on Wednesday on the PBOC website. His comments come as the threat of financial crisis in China has been brought into sharper focus by the economic damage resulting from the coronavirus pandemic. Some local governments and financial institutions still attempt to force the central government or the central bank to bail them out, citing excuses of social stability Yi Gang Unlike the US Federal Reserve and European Central Bank, the PBOC is not an independent institution but a ministerial body under the State Council, meaning it has to do its part to serve central government goals. At the same time, the central bank is no longer a cashier for Beijing and is trying to maintain its independence from other government institutions, including the Ministry of Finance and local governments, which could put pressure on it to hand out money. Yi, who obtained his doctoral degree in economics from the University of Illinois, wrote that these requests bring danger. “Some local governments and financial institutions still attempt to force the central government or the central bank to bail them out, citing excuses of social stability,” said Yi, who is also a former faculty member at Indiana University. “The moral hazards still stand out in financial regulation and risk disposal.” China debt: how big is it and who owns it? The central bank as China’s ultimate lender must be alert to systemic risks in the financial system, but it should not be the only one to foot the bill when trouble emerges, he said. “Shareholders, creditors, local governments and local regulators” of troubled financial institutions must take their share of responsibility and be held accountable, according to Yi. Yi’s approach has become the default mode for Beijing to deal with problematic financial institutions. In the case of Baoshang Bank, a lender in Inner Mongolia, the central bank decided to let it file for bankruptcy instead of bailing it out. Yi is not alone in pushing for a financial de-risking campaign. Guo Shuqing , chairman of the China Banking and Insurance Regulatory Commission, said recently the government will not intervene if problems can be solved through the market. He also flagged the property market as the “biggest grey rhino financial risk” facing China. The statement by Yi comes as the boundary between fiscal and monetary policy blurs worldwide, as central banks in advanced economies conduct unprecedented monetary easing as part of stimulus plans. The prudent monetary policy stance of the PBOC, signalled by restrained easing and positive interest rates, is helping lure capital into China and yuan assets. Yi wrote that a modern central banking system is an integral part of a modern state. “If a central bank fails to perform its duty, it will either cause inflation and asset bubbles due excessive liquidity or credit crunch, or even economic and financial crisis,” he said. Financial risk in China was high partly because the central banking system was not fully modernised in line with a market economy. “It’s always easier to loosen monetary policy than to tighten monetary policy,” Yi wrote. Yi’s comments come against a backdrop of debate about whether it is possible to separate fiscal and financial funds in China, where authority is highly centralised. When China’s former premier Wen Jiabao decided to launch a massive stimulus programme to cushion the impact of the global financial crisis in 2008, the PBOC was forced to slash interest rates and unleash liquidity, providing cheap funding to state-owned enterprises and local government financial vehicles that has left lingering debt to this day.