We first strictly distinguish between “deficit monetization”, quantitative easing (QE) and the central bank’s purchase of government bonds. my country’s issuance of base currency through the purchase of foreign exchange has become a history. The issuance of base currency by the People’s Bank of China will inevitably increase various types of assets other than foreign exchange, mainly creditor’s rights. Whether in terms of monetary theory or national practice, the central bank’s purchase of national debt is not a taboo. It is equivalent to “deficit monetization.” We went on to clarify that my country has a large-scale recessive deficit monetization. From the perspective of preventing financial risks and improving efficiency, explicit deficits are better than recessive deficits. In order to increase relief efforts under the epidemic, central deficits are better than local deficits. For emergency needs, the central bank can increase its efforts to purchase treasury bonds to finance the government. The key is to avoid hyperinflation and asset price bubbles, and exit in a timely manner after the crisis. Finally, from the perspective of interest rate marketization reform, the central bank’s purchase of government bonds may not necessarily weaken the central bank’s independence and authority. Refusing to purchase government bonds is not conducive to the central bank’s own operations and is not conducive to the central bank’s promotion of interest rate marketization.
What is “deficit monetization”? What is the difference between QE and the central bank buying government bonds?
There are two key words for “deficit monetization”, namely “deficit” and “currency”. There are two forms of “deficit”, one is dominant and the other is recessive. The explicit deficit is our country’s official deficit, which has basically accounted for 2-3% of GDP in the past few years. However, as we all know, my country’s government debt has been rising rapidly since the end of 2008, and the actual deficit rate is much higher than the official deficit rate, which is about 7-10% of GDP. In this way, local government financing platforms have played a key role. “Currency” also has different definitions. The narrowest currency is cash in circulation. Broad money includes most bank deposits. In this article, we define narrow currency as the base currency, which is the sum of the cash issued by the central bank and the deposit reserve of commercial banks in the central bank. If the central bank “prints money” as a result of purchasing assets, it means increasing the base currency. Currency multiplier refers to the multiple relationship between broad currency and base currency.
Under normal circumstances, a country’s central bank will actively adjust the base currency and currency multiplier in order to maintain price stability. Given a currency multiplier, in order to cope with economic growth, the amount of base currency issued by the central bank will rise simultaneously with nominal GDP on the premise of maintaining a low level of inflation. In this process, when the central bank provides reserves or cash to commercial banks to increase the base currency, it will require equivalent assets in exchange, and the national debt will generally become the central bank’s first-choice asset because it has no default risk and high liquidity. The behavior of the central bank to purchase treasury bonds in this situation is not as we usually understand the monetization of the deficit, but the behavior of the central bank to distribute the seigniorage brought by the printing of money to the financial department of the central government. Take the United States as an example. At the end of 2007 before the global financial crisis, that is, before the opening of QE, the Federal Reserve held US Treasury bonds of US$ 755 billion, which was 92% of the US dollar currency in circulation at that time and accounted for the total assets of the Federal Reserve at that time. 85% and 8.4% of the balance of US Treasury bonds. We believe that as long as inflation is controlled at a reasonable level, if the base currency balance rises with the total amount of the national economy, the seigniorage generated is mainly handed over to the government to cause a certain degree of deficit monetization, and its negative impact is limited. Judging from the practice of various countries, it is also possible that while the government generates fiscal surplus, its central bank continues to purchase national debt to transfer seigniorage to the government.
In addition to the above normal circumstances, there are three exceptions for central banks in the issuance of base currencies. One is that countries such as Zimbabwe and Venezuela used excessive printing of money to maintain their government spending, which eventually led to hyperinflation and the collapse of the national economy. This situation is typical of deficit monetization. The second is the loose quantity, which is QE. After the Lehman crisis in September 2008, the central banks of major advanced economies mostly purchased their own long-term national debt and risky assets to maintain financial stability and lower market interest rates. Whether QE will monetize the deficit can be judged based on four criteria: 1) Whether a large amount of government debt was purchased during the implementation of QE; 2) After the economic recovery, whether the growth of government debt continues to be higher than the growth rate of nominal GDP? 3) Whether it has caused high inflation; 4) Whether the national debt held by the central bank is reversible, and whether the government has the willingness to redeem the national debt held by the central bank. Specifically, if a country’s government is in the process of QE, the assets purchased by its central bank are mainly treasury bonds. After the economy recovers, the country’s government has no intention to reduce its deficit. The government debt to GDP ratio continues to rise, and inflation rises and exceeds The target set before, the central bank of this country did not shrink the balance sheet and withdraw from QE in time, it can clearly determine that the deficit monetization has occurred.
The third exception is that the central bank of a country continuously purchases huge foreign exchange and issues a large amount of base currency during a certain period. The typical case in this regard is the central bank of our country. From joining the WTO at the end of 2001 to June 2014, the central bank of our country increased the base currency of RMB 27.7 trillion due to foreign exchange purchases, and actually increased its foreign exchange reserves by US$3.8 trillion in the process. In order to cope with the large amount of base currency passively released due to the rapid increase in foreign exchange reserves, and to prevent economic overheating and inflation, the central bank adopted two methods: raising the reserve ratio and issuing central bank bills to lock in most of the base currency. Therefore, in addition to increasing the currency multiplier, lowering the RRR can also loosen the previously locked base currency. In recent years, my country’s foreign exchange reserves have declined. In the process, the central bank has been forced to sell foreign exchange and recover the renminbi. Therefore, it is necessary to reduce the stock of central bank bills, lower the RRR, and issue additional base currencies through various channels such as PSL, MLF and TMLF.
In many cases, the government purchases government debt through QE, and it does easily lead to deficit monetization. But it must be said that QE and deficit monetization are not the same thing. On the one hand, when the central bank implements QE or large-scale foreign exchange purchases, even if it does not purchase government debt on a large scale, it purchases other assets such as credit bonds or foreign exchange and releases a large amount of base currency, resulting in lower interest rates and broad money growth. At the same time, the government issued a large number of debts to increase the deficit. After the economic recovery, it still maintains a large deficit, causing the ratio between the government and GDP to continue to rise and leading to rising inflation. This is actually the monetization of the deficit. On the other hand, under special circumstances of the central bank, even if it purchases a large amount of government debt when implementing QE or large-scale foreign exchange purchases, if there are hedging measures, it does not cause inflation, and it can gradually decline afterwards, and it may not cause deficit monetization. In this debate on deficit monetization, some scholars emphasized the difference between “printing money” and “borrowing money”, believing that the central bank issues base currency (“printing money”) to purchase treasury bonds and finance the government or its financing through the banking system There are essential differences in platform lending. In our opinion, there are indeed differences between the two, but the differences are limited. First of all, as mentioned above, a country’s central bank can completely refuse to directly purchase treasury bonds, that is, not directly “print money” to the government, but can accelerate the money supply by purchasing non-government assets, causing inflation, and reducing the government’s reality in disguise. Existing debt. Secondly, the central bank can also issue base currency by providing various loans to banks, and then the bank can issue loans to government agencies or their financing platforms, causing hidden deficits.
Based on the above discussion, we can divide “deficit monetization” into four categories: narrow monetization of explicit deficits, broad monetization of explicit deficits, narrow monetization of implicit deficits, and broad monetization of implicit deficits. Except for the special treasury bonds that were mainly replaced by the establishment of China Investment Corporation, my country’s central bank does not hold other government debts, so there is no narrow monetization of explicit deficits in my country. The total official government debt in my country has reached 36 trillion yuan, and the total local government debt is 21.3 trillion yuan, of which about 14 trillion yuan comes from the debts of local government financing platforms that have been replaced. The vast majority of local government debt was generated by large-scale stimulus after the global financial crisis, so objectively speaking, my country has a certain degree of broad monetization of explicit deficits. We believe that monetization of shed reform loans supported by the central bank’s mortgage supplementary loan is close to the narrow monetization of implicit deficits, while some platform financing, including bond financing, belongs to the broad monetization of implicit deficits.
The bulk of my country’s deficit monetization is mainly related to the implicit deficit of local governments. It is recognized by the academic circles that my country has a large hidden deficit, and the main source is local government financing platforms. From the Lehman crisis in September 2008 to the end of 2009, my country’s central bank put a total of 5.4 trillion yuan in liquidity into the market through various operations, which is about 16% of the 2009 annual GDP. The central bank and other financial regulatory agencies have also greatly expanded credit demand by cutting interest rates, increasing the loan-to-deposit ratio, encouraging local governments to set up financing platforms, and lowering down payments on real estate mortgages, and so on. The 16.7% of the total jumped to 26.5% in 2009. At that time, the main force for increasing leverage was local government financing platforms. According to estimates by some scholars, the hidden debt of local governments in my country may be between 35 trillion and 50 trillion yuan. There is really no accepted method of calculating how much debt is in deficit. But from the historical data of debt replacement and analysis of the actual situation, this ratio is not low. Due to the soft budget constraints and rigid payment of local governments, we believe that a considerable part of the urban investment debt will be difficult to repay in the future, and the problems have accumulated to a certain extent. The central government also needs to undertake debt replacement to make the implicit deficit explicit. In addition, under my country’s economic and financial system, commercial banks and the shadow banking system they support bear the bulk of the supply of credit to platforms. In order to prevent systemic financial risks, the central bank, as the lender of last resort, will eventually have to pay for the bad debts of the commercial banks in question. In 2019, the People’s Bank of China has directly or indirectly rescued several city commercial banks and rural commercial banks. If some commercial banks get into trouble due to excessive lending to the platform and trigger a central bank bailout, it will increase the base money supply and actually lead to the narrow monetization of the hidden deficit. What needs to be explained is that we are not criticizing the “four trillion” policy of the year. On the contrary, the rapid expansion of fiscal expenditures that year was the key to the stability of the Chinese economy during the global financial crisis and the ability to maintain rapid growth after the crisis.
If some platform debts caused the broad monetization of hidden deficits, the monetization shed reform that began in 2015 has been very close to the narrow monetization of explicit deficits. By November last year, the central bank directly increased the base currency by about 3.6 trillion yuan through the mortgage supplementary loan (PSL) channel. This fund is used as an intermediary agency by the National Open Bank, and finally loaned to the local government. China Development Bank is a policy bank, not a commercial bank. The flow of shed reform loans does not necessarily follow commercial principles. The difficulty of repaying the principal and interest of this shed reform funds may be very difficult, which is essentially similar to the transfer payment of the central government.
The central bank bought government bonds is not restricted – currently the most relevant finance and central bank need to clarify a few issues
finance and central bank division of labor and cooperation is one of the key national issues of governance, which is round about “deficit monetization,” the core issue of debate. Combining the experience and lessons of other countries and the actual situation of our country, we believe that improvements can be made in four areas: deficit transparency, increase the proportion of central deficits, the central bank appropriately purchases treasury bonds and promote interest rate marketization, fiscal and central banks are responding to crises and countercyclical adjustment To strengthen coordination.
The first is the transparency of the deficit. While increasing the visible deficit, reducing local government deficits, especially platform liabilities, is what we call closing the back door and opening the front door. This can reduce the risks borne by banks and capital markets, thereby reducing systemic financial risks. The process of deficit transparency is actually a process of hardening the financial constraints of local governments. Compared with platform liabilities, the use of national debt and local debt is a relatively transparent process that accepts more public supervision. Taking the monetized shed reform debt as an example, the public has no way of knowing how to allocate 3.6 trillion PSL funds among provinces. Deficit transparency has other advantages in special times. Under special circumstances such as the impact of the epidemic this year, the government needs to urgently mobilize resources to bail out. If the central bank allocates base currency to commercial banks and lets them allocate loanable funds, it may not necessarily achieve the policy goal. In the past few counter-cyclical adjustment processes, banks have repeatedly introduced large amounts of funds into the real estate industry through various channels when the government stimulated the economy. This year, in order to cope with the rare wave of unemployment and small and medium-sized enterprises closing in decades, the central government needs to raise a large amount of financing at a low and stable interest rate so as to have sufficient financial resources to help small and medium-sized enterprises and the unemployed. Therefore, a transparent deficit is more important. Sex.
Some scholars oppose “deficit monetization” because they believe that if the central bank pays the government, it may return to soft budget constraints. I think the opposite is true. Under the current circumstances, government spending will continue to grow, and the actual deficit rate will inevitably rise sharply this year. This is also a fact and cannot be avoided. What we need to do is not to pursue unrealistic growth targets so as to control the actual deficit rate. At the same time, make the deficit explicit, so as to harden the local government budget constraints. If the central bank is blindly banned from buying treasury bonds, it may actually force the central bank to issue additional base currencies through various other channels, in a disguised form to encourage local governments to expand hidden debts, and eventually lead to more serious deficit monetization.
The second is to increase the central deficit ratio between the central government and the local governments. The transfer payments from the central government to the local governments should also be completely transparent, taking into account equality and efficiency. There has been great progress in this regard this year. The government has announced in the two sessions that the increase in official deficits and special treasury bonds totaling 2 trillion yuan this year will be transferred to local governments. Why should the central government deficit increase in particular this year? Under the impact of the global epidemic, tens of millions of people are unemployed, and a large number of small and medium-sized enterprises are facing survival problems. Therefore, policies should increase support for families and enterprises, especially small and micro enterprises, to prevent large-scale enterprises and families from defaulting and bankrupting, and to avoid a rapid rise in unemployment. However, most local governments usually proceed from their own interests and are not motivated to bail out. Taking into account the externalities of bailout policies and the mobility of 300 million migrant workers, bailout policies require national coordination and cannot rely too much on local governments. .
The third is the coordination between the finance and the central bank. Some scholars are too dogmatic and one-sidedly understand the independence of the central bank, and regard any coordination and cooperation between the central bank and the finance as a scourge. This is a misunderstanding of macroeconomic theory and ignorance of the practice of various countries. In fact, finance and the central bank are two government departments, in charge of important areas of the national economy. Fiscal policy and currency need to be coordinated to ensure the stable operation of the national economy, especially the stability of liquidity and price stability. The financial department should prepare a budget at ordinary times, set expenditures based on revenue, try to avoid deficits, and resolutely avoid normalizing loose stimulus. Only in this way can the government have room to implement large-scale loose stimulus policies when the economy encounters a huge shock. In the fourth quarter of 2019 before the outbreak of the new crown epidemic, the author once wrote an article against normalizing stimulus to “guarantee 6″. In an article I discussed with Professor Yu Yongding in early December last year, “China’s current policy easing space has been significantly reduced. Excessive stimulus will bring excessive costs, increase systemic financial risks, and worsen the balance of payments. Therefore, the government should not justify the gains. Cherish the little policy space, use easing policies carefully, make good use of easing policies, respect economic laws, and focus on investment efficiency. The increase in fiscal investment should not cause too many distortions to the market.”
However, when the economy is severely impacted by the epidemic, and fiscal revenues have fallen sharply, the government should substantially increase financing to ensure stable expenditures and stable economic operations. In particular, fiscal and monetary authorities need to increase coordination. In addition to the issuance of treasury bonds, in recent years, some countries have set up special purpose institutions (SPVs) to rescue certain market entities during crises. Generally, the central bank will provide the bulk, and the small fiscal will be used as poor funds to bear risks. From a legal point of view, finance directly represents the government and taxpayers. If the SPV suffers losses, the state will bear the tax burden. In fact, the citizens will bear it in proportion to its tax burden; if there is a surplus, it will supplement the treasury. The central bank’s capital contribution must consider safety, and only after having fiscal funds as a disadvantage can it be guaranteed that there will be no monetization due to losses in SPV. For example, in the context of the impact of this year’s epidemic, to provide loan facilities to small and micro enterprises, theoretically there can be two solutions. One is the central bank’s sole responsibility and directly inject capital to establish SPVs to motivate small and medium banks to lend to small and micro enterprises, but does not bear any Risk, allowing banks to fully assume the risk of lending. There is also a plan for the central bank to cooperate with the financial sector. The small fiscal head is used as the poor funds. The central bank “prints money” and sets up the SPV. The small and micro loans are packaged to buy small and micro loans from small and medium banks and bear all or part of the risk. I believe that under the impact of the epidemic, the national finance will bear part of the lending risk to maintain economic stability, the effect will be better, the enthusiasm of small and medium banks will be higher, and small and micro enterprises will be better rescued.
The central bank should purchase government bonds to promote market-oriented interest rate reform
from the perspective of monetary policy of the central bank, bought government bonds should be moderate, to further improve our risk-free yield curve, promote market-oriented reform of interest rates, so as to further enhance the central bank’s monetary policy operations Ability and level. The central bank’s assets should be as safe and liquid as possible, so that it can flexibly manage the money supply and become the ballast stone for the security of the financial system. The treasury bonds issued by the financial sector should become the benchmark for a country’s interest rate system. The central bank participates in treasury bond transactions to regulate interest rates and base money supply.
In the past decade or so, the central bank has made great efforts in interest rate marketization and achieved high success. But to be honest, the reform of interest rate marketization is far from complete. The original bank deposit and loan benchmark interest rates were the main control tool. The model still exists, and the central bank has not successfully constructed a new benchmark interest rate system in the past few years.
First, the disintegration of the original interest rate control system was not thorough. After 2015, the reform of bank loan interest rate and deposit interest rate did not proceed further, and the reform goal of the bank to independently adjust the LPR (loan market quoted interest rate) was stranded. The essence of the LPR reform in August 2019 was the reopening of the central bank The policy interest rate (one-year MLF interest rate) to regain control of LPR is almost back to the central bank’s direct control of the benchmark interest rate of bank loans. Regarding the benchmark deposit rate, it has recently clarified its status as a “ballast stone”, and it is impossible to further liberalize it in the short term. Under the epidemic, given the current 1.5% bank deposit benchmark interest rate, there is very limited room for reduction, which severely limits the central bank’s ability to control market interest rates.
On the other hand, the regulatory framework with “interest rate corridor + policy rate” as the core is still in the groping stage. DR007 as the benchmark target interest rate fluctuates too much to fully reflect the central bank’s intentions. Sometimes the information transmitted is very confusing, which makes the market confused. There are many reasons for this situation, but the key point is that in addition to foreign exchange, the central bank has no tradable, risk-free assets with high liquidity. After 2014, due to the rapid decline in foreign exchange accounts, the central bank of our country lost the original main channel to increase the base currency. In addition to lowering the RRR, it invested 8.3 trillion yuan in base currency through new channels such as MLF and PSL. The final assets formed by the funds invested by the tool have almost no liquidity, and generally cannot be flexibly used by the central bank to affect market interest rates. When foreign exchange reserves are rising rapidly, the central bank bills issued by the central bank can not only hedge against excessive base currency issuance, but also flexibly adjust the liquidity of the interbank market through the transaction of central bank bills. However, the central bank bills withdrew from the stage of history due to the decline in foreign exchange reserves After that, except for foreign exchange, the central bank no longer holds any assets that can be flexibly traded. However, central bank foreign exchange transactions directly affect the exchange rate and are not suitable for adjusting market liquidity and short-term interest rates. Since there are no tradable liquid assets, my country’s central bank cannot control short-end interest rates through flexible open market operations (OMO). In actual operation, the central bank’s 7-day reverse repurchase has assumed the function of short-term liquidity adjustment. However, since the central bank’s reverse repurchase interest rate itself has the function of policy interest rates, it cannot change frequently, and the number of reverse repurchases is highly uncertain. Sometimes the central bank reverse repurchase cannot effectively adjust the interest rates of DR007 and other short-end inter-bank markets. Treasury bonds can only be used as collateral during the central bank’s reverse repurchase process and are not the object of transactions. Therefore, the central bank’s OMO cannot increase the liquidity of treasury bonds by flexibly trading treasury bonds, thus sensitively regulating inter-bank liquidity and controlling benchmark target interest rates such as DR007.
A serious consequence of this great debate on “deficit monetization” is that the central bank resolutely avoids buying treasury bonds out of taboos. Its asset side does not have any flexibly tradable assets other than foreign exchange, and cannot effectively affect short-term market interest rates and bind it. This has further delayed the process of interest rate marketization in my country. At the same time, in order to stimulate the economy, various illiquid risk assets such as MLF and “mortgage supplementary loans” have risen rapidly, disguisedly encouraging local governments to increase hidden liabilities, making the soft budget problem not only unsolved, but even to a certain extent Has deteriorated. According to the law, the central bank cannot directly buy treasury bonds in the primary market, but purchasing treasury bonds in the secondary market should not only become a forbidden zone, but should become an important part of the central bank’s promotion of interest rate market reform. In fact, the national debt held by buying and selling in the market is an important tool for the central banks of developed countries to adjust the base currency and adjust market interest rates. Many people mistakenly believe that European and American central banks only began to hold their national debt after the 2008 global financial crisis when they adopted the quantitative easing policy. In fact, this is not the case. Take the Fed as an example. At the end of 2007, the amount of US Treasury bonds held by the Fed was US$755 billion, accounting for 5.2% of the US GDP that year. These treasury bonds have facilitated the Fed’s open market operations to regulate short-term interest rates. In our view, setting aside the debate on “deficit monetization” for the time being, even from the perspective of my country’s interest rate marketization, the central bank should seriously consider gradually increasing a certain proportion of national debt in its assets, reducing PSL, MLF, and re- The proportion of loan discounts.
Some people think that the reason why the central bank cannot use treasury bond transactions to adjust the short-end interest rate is because the issuance of treasury bonds is small, the duration of collocation is unreasonable, and the market liquidity is low. Treasury bonds are used as collateral for commercial banks to borrow from the central bank. From this perspective, first, the central bank should break through unnecessary taboos. When it needs to issue additional base currency, a higher proportion of short-duration and highly liquid government bonds should be purchased. From a fiscal point of view, increasing the explicit deficit while reducing the implicit deficit, and reducing the local deficit while increasing the central deficit. This can increase the scale of national debt issuance and match the duration of the national debt, which is conducive to the formation of a more complete market. Risk curve. It needs to be pointed out that because local government bonds involve multiple provinces, municipalities and autonomous regions, the yields are slightly different from each other, and the liquidity is not as good as that of national bonds. It is difficult to coordinate the issuance duration. Compared with national bonds, it is not an ideal open market for central banks. The transaction object of the operation.