A Taiwan-based economist says the Chinese leader’s instruction to the central bank to resume trading treasury bonds is tantamount to printing more money to address the ongoing economic predicament, which will lead to a ruling crisis for the Chinese Communist Party (CCP).
The People’s Bank of China (PBC), China’s central bank, has not started trading immediately since Xi Jinping’s directive at the Central Financial Work Conference in October 2023. The communist leader requested the PBC to enrich its monetary policy toolkit by “gradually increasing the trading of treasury bonds in its open market operations.”
This has been an unusual official order for the PBC over the past two decades. The bank typically relies on other methods, such as refinancing and adjusting banks’ deposit-reserve ratios, to inject liquidity into the market.
“In economics, this is called bond monetization,” said Wu Chia-lung, macroeconomist and Taiwan AIA Capital lead economics researcher. He further explained that the cash-crunched CCP urges the central bank to buy all-level government bonds. “This is known as monetizing the government’s debts, which will result in severe inflation.”
In an interview with The Epoch Times on April 3, Mr. Wu indicated two forms of the bond market: the primary or issuance market and the secondary or liquidity market.
Suppose trading in the primary market, the central bank will endorse as many bonds as the Ministry of Finance wants to sell, just like direct money printing or currency release. As per Mr. Wu, this will lead to a regime crisis soon after.
“Under normal circumstances, the central bank may trade government bonds in the secondary market, i.e., the liquid market. However, if financial institutions or investors are not optimistic about the market, the bonds will not be sold.”
Issuing more bonds and then directing the Central bank to buy them or printing more money to digest them, by whatever means, Mr. Wu noted that the CCP has reached a critical juncture where it has no way to get out of its economic mess. “Xi’s administration took such a risk and gone so far, signaling it is at the point of no choice.”
The CCP’s central and local governments have long faced a massive financial gap. In the late 1990s, the Central Committee promulgated a land policy encouraging local governments to sell land to fill their financial gap.
However, the collapse of the real estate market triggered a land financing crisis. A large quantity of unsold buildings made it difficult for developers to secure bank loans for land development. Consequently, local authorities started issuing bonds to cover their fiscal deficits.
Citing a different example, Mr. Wu described that in a well-established securities market, such as the U.S.’s central bank, the Fed, when it buys bonds or bonds backed by collateral, “The Fed deals with securities brokers, who deposit checks issued by the Fed into their correspondent bank accounts. Assuming the correspondent bank is Citibank, Citibank gets the check and asks the Fed for the money, and then the Fed will deposit the funds into Citibank’s account at the Fed.”
“After the commercial bank [Citibank] has this account, which is the reserve, it can increase the bank’s credit and lending, and the whole process is appropriately supervised.” The Fed’s trading behavior is open to public scrutiny and subject to legal constraints, so it’s applicable for a central bank to buy state bonds.
However, this is not the case in the CCP’s system; the Chinese central bank’s intervention in the state debts “would probably get out of control, leading to hyperinflation and a termination of the CCP regime.”
