China’s central bank should be more like the Fed, top researcher says

The rapid rise of local government borrowing is the biggest systemic risk in China today, CASS researcher Zhang Bin says

Beijing should take its lead from the US Federal Reserve and adopt a more aggressive monetary policy

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China’s central bank has resisted cutting benchmark interest rates or buying bonds to pump money directly into the financial system. Photo: Reuters

Published: 9:00pm, 11 Apr 2021Updated: 9:00pm, 11 Apr 2021

China should reduce its reliance on local government debt to finance economic growth and instead adopt an aggressive monetary policy like that of the US to boost consumption, a top Chinese researcher said, as Beijing ramps up its efforts to control the risk of excessive borrowing.

Unlike the US Federal Reserve, China’s central bank has resisted cutting benchmark interest rates or buying bonds to pump money directly into the financial system, a stimulus method known as quantitative easing.

The world’s second-largest economy has for decades relied on debt-fuelled growth, and the biggest systemic risk in China today is the rapid rise of local government borrowing to fund their operations and infrastructure investment, according to Zhang Bin, deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS).

“China’s current situation is dependent on fiscal policy, especially a broad fiscal policy, which is being used too much,” he said in a blog post published on Friday.

“If you think China has too much liquidity, don’t attribute it to monetary policy. Under our broad fiscal policy, local governments have borrowed heavily, creating a large amount of credit demand, hence adding more liquidity.”

Some analysts think the People’s Bank of China will tighten its policy this year. Photo: Reuters

But others think the People’s Bank of China (PBOC) is more likely to tighten its policy this year due to overriding concerns about excess liquidity resulting in asset bubbles in the property and financial markets that could result in more debt defaults.