China’s central bank has called for “realistic” criticism of its performance amid a sharp rise in high-profile domestic bond defaults, following a surprisingly sharp attack from a former finance minister.
The disagreement among Beijing’s inner circle of economic policymakers, which burst into view just two days after the nation’s top leaders vowed to provide policy support for the economy next year to counter the impact of the coronavirus pandemic and external uncertainties, comes amid heightened concern about risk in some parts of the financial system.
Speaking at the China Wealth Management 50 Forum on Sunday, outspoken former finance minister Lou Jiwei opened fire on the People’s Bank of China (PBOC) for its regulation of bond markets, its supervision of big financial tech firms, and its 170 billion yuan (US$26 billion) capital injection of taxpayers money into the failed Baoshang Bank. He also suggested the nation’s top financial regulatory body needed new leadership.
Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.
In response to Lou’s criticism, Finance News, the newspaper affiliated with the PBOC, said on Monday that the current situation must be considered from a historical and “realistic perspective”.
“The interbank bond market is actually for institutional investors. It is in line with market rules to issue bonds there,” the paper’s editorial said. “Forced delisting [of bonds] could lead to a plunge in banks’ demand, fluctuations in interest rates, and systemic financial risk if corporate cash flows were adversely affected.”
A separate article by Zhang Feiyu, widely believed to be a pen name used to reflect the views of financial regulators, said the bond market problems occurred because of a lack of transparency that had resulted in economic distortions.
“People think that attempts to evade debt, the distorted pricing of local-government bonds, an unsound yield curve for treasury bonds and fund embezzlement of large shareholders are financial market problems. Actually they’re not,” Zhang wrote.
“They are a reflection of government intervention and the inadequate reform of local government-owned enterprises.”
China lacks a mechanism that solves risks before or during their occurrence
The PBOC is a central part of China’s regulatory mechanism, which is in turn overseen by the Financial Stability and Development Commission, a body chartered in 2017 and headed by Vice-Premier Liu He, President Xi Jinping’s top economic adviser.
Still, Lou pulled no punches in his criticism of the central bank’s handling of systemic risk.
“China lacks a mechanism that solves risks before or during their occurrence,” said Lou, who now serves as director of the foreign affairs committee at the Chinese People’s Political Consultative Conference, an advisory body to the central government.
“The Financial Stability Oversight Council, the organisation responsible for macroprudential supervision in the United States, is chaired by its Treasury Secretary … because the secretary first and foremost represents the interests of the taxpayers,” he added, hinting at the need for change to the existing regulatory framework.
A transcript of the speech, which went viral on Chinese social media, was quickly taken down.
The central bank and the finance ministry are both under the State Council, the country’s cabinet, but they have engaged in several major policy debates in the past several years.
In June 2018, Xu Zhong, the then-research chief of the central bank, openly questioned whether the finance ministry was following the State Council directive for a “proactive” fiscal policy given that the budget deficit ratio was at a six-year low and called for a stronger fiscal response to help offset the economic shock from the US trade war.
China announced its largest ever tax cut of 2.3 trillion yuan last year and raised its deficit ratio to a record high of 3.6 per cent this year to fight the economic effects of the pandemic and trade war.
Earlier this year, Liu Shangxi, president of the Chinese Academy of Fiscal Sciences, which is affiliated with the finance ministry, called on the central bank to directly fund the government’s fiscal deficit through its monetary policy, a proposal which the central bank opposed.
This stirred heated debate among market analysts, although the idea was vetoed in subsequent central government documents.
Liu Shengjun, director of the Shanghai-based research group, China Financial Reform Institute, said it was not unusual for different agencies to air their views, even though they shared the same mission to maintain financial stability.
“Many issues raised by Lou are actually old and regulatory coordination is ongoing,” he said.
More from South China Morning Post: