Why PBOC research head is criticizing China's fiscal policy

Xu Zhong, chief of the research department at the People's Bank of China, last week wrote an article on China Business News about the nation’s fiscal policy.

In the article, Xu said: “China’s economic issues are structural and systemic. There is still plenty of room to pursue the fiscal policy. But evidence shows that the fiscal policy is not being implemented actively enough.”

Xu is apparently blaming the fiscal policy for the nation’s economic problems.

The Ministry of Finance is in charge of the fiscal policy while the PBOC oversees monetary policy.

As such, it is rather unusual for the head of PBOC’s research department to openly criticize the fiscal policy. In China, government agencies are supposed to be working in harmony.

Xu identified three problem areas in the current fiscal policy:

First, corporations and households have yet to feel the benefits of tax cuts, which lie at the core of China’s accommodative fiscal approach.

Second, the Ministry of Finance has done little to prevent local governments from boosting their debt pile.

Third, as China pushes ahead with financial deleveraging, the Ministry of Finance has not been providing enough support to state-owned financial institutions through the injection of funds.

Instead, the PBOC has issued “special government treasuries” to help banks replenish their capital.

The key message Xu is trying to deliver is that the Ministry of Finance has not done its job. Instead, the PBOC has assumed the responsibility of injecting capital into state banks.

The Ministry of Finance has yet to make an official response to Xu's article.

Such open fights between the central bank and the finance ministry could imply some serious problems are brewing, and the PBOC is apparently warning beforehand that if things get ugly, it is not at fault.

This article appeared in the Hong Kong Economic Journal on July 16

Translation by Julie Zhu

[Chinese version 中文版]

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