Thread by @ChinaFinance40

Allowing monetization of fiscal deficits may lead to lack of discipline in government behavior new.cf40.org.cn/uploads/202005… #COVID__19 #deficit #economicstimuluspackage

Monetization of fiscal deficits has prerequisites which cannot be ignored: One is that monetary policy is caught in liquidity trap, when extremely loose monetary policy is impossible so expansionary fiscal policy becomes the last resort for implementing various rescue measures.

Second, there is no room left for fiscal expansion. A large-scale deficit must be adopted, and it is hardly possible to expand government deficits through normal market sales.

Third, the market interest rate is already very low (usually zero). The costs of financing through fiscal debt and central bank’s currency issuance are basically the same. The former and the latter have an equivalent function.

Fourth, laws including the Central Bank Law must be amended or various exceptions must be initiated to allow the government to break through the deficit ceiling and allow the central bank to enter the primary bond market to purchase government bonds directly.

China has not reached the point where monetization of its fiscal deficits is imperative:
1, China’s fiscal space remains very large
2, China’s monetary tools are still highly effective
3, China’s government debt still enjoys very large market space

4, the Article 28 of the Law of the People's Republic of China on the People's Bank of China stipulates that "The People's Bank of China may not provide the State with overdraft facilities, and may not directly subscribe and underwrite state bonds and other government bonds."

5, there are additional negative impact of deficit financing on the economic governance system and market operation system