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PBOC governor sends warning to central banks on quantitative easing policies

Yi Gang, Governor of the People's Bank of China (PBOC), speaks during the Lujiazui Forum 2019 in Shanghai, China on Thursday, 13 June 2019.

China’s central bank governor said quantitative easing implemented by global peers can be damaging over the long term and vowed to keep policy normal for as long as possible.

Central banks should try their best to avoid asset purchases because in the long run they will “damage market functions, monetize fiscal deficits, harm central banks’ reputation, blur the boundary of monetary policy and create moral hazard,” People’s Bank of China’s Governor Yi Gang said in an article posted by the central bank Tuesday.

When central banks have to purchase assets, the programs should be in proportion to the size of the market’s trouble, Yi said. The interest rate in some economies have approached or even dipped below zero, he said.

“China will extend the time for implementing normal monetary policy as much as possible and there is no need for asset purchases,” the governor said. Conditions allow for that stance because the economy’s potential growth will likely be maintained between 5%-6% and the yield curve remains normal, he said.

Major central banks like the Federal Reserve and European Central Bank have turned to QE to support their economies through the Covid-19 pandemic, providing a liquidity boost to banks to lend to customers, but also driving up financial risks as speculative flows move into everything from property to commodities.

Yi’s comments represents one of the most direct criticism of the unprecedented stimulus unleashed by global central banks. China’s monetary authority has vowed to set its own agenda in an effort to decouple its policy from the U.S.

His remarks “point to lower odds of policy rates cuts in the near term,” Goldman Sachs Group Inc. analysts led by Maggie Wei said in a report late Tuesday. But this view doesn’t necessarily go against another cut in the reserve requirement ratio, which could happen in the fourth quarter to replace maturing policy loans, they said.

Real interest rates should be slightly lower than the real economy growth, which has been the case in China for most of the time in the past, Yi said. Too low interest rates are unsustainable because they could lead to overinvestment, excess capacity, high inflation and asset bubbles, he said.

The PBOC will also continue to reform interest rates to make them more market-oriented, Yi said. It will improve the mechanism for forming the loan prime rate, and urge banks to enhance the quality of their quotations, according to the article. The central bank will also seek to improve the treasury bond yield in a market-based way.

After the PBOC adjusted the way banks can set deposit rates in June to lower long-term funding costs, lenders could also make their own decisions if they need to set the rates at lower levels in the future, Yi said.

In a separate speech released Tuesday, Yi said China’s interest rate is at a middle level compared with other developed and developing economies, which is beneficial to the economy. The exchange rate and currency unit is also at an appropriate middle level, he said in the September 19 speech at the Peking University.


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