China’s central bank warned local governments and financial institutions against relying on it to fund spending or bailouts in an article that touted monetary policy independence.
A «firewall» must be set up between the treasury and the central bank, according to the article authored by Yi Gang, governor of the People’s Bank of China (PBoC).
PBoC «must not assume corporate credit risks» to avoid damaging the credibility of the yuan, Yi said in the article.
«Social Stability» as an Excuse
In addition to urging for the accountability on the part of distressed financier’s «shareholders, creditors, local governments and local regulators», he also expressed disapproval of using social stability, in some cases, as a reason for local entities to pressure the central government or the PBoC for a bailout.
According Yi, «moral hazards» persist in terms of how the sector is regulated and its disposal of risk.
Central Bank’s Duty
A central bank’s failure to perform its duty will cause inflation, asset bubbles and even liquidity, economic and financial crises, Yi said, adding that monetary loosening is always easier than monetary tightening.
Yi’s comments place emphasis on risk – a continuing theme amongst Beijing’s top officials including Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, who recently revealed that property-linked loans made up 39 percent of all bank lending – more than one-third higher than the official data – calling it the biggest ‘grey rhino’ risk in the nation.
Although also a driver of monetary policy, PBoC differs from other major central banks such as the U.S. Federal Reserve and the European Central Bank in that it is not an independent institution but an entity directly under the State Council, Beijing’s chief administrative body.
