context: Disaccord between PBoC and MoF has triggered intense public debate. The debate has demonstrated that internal disagreement is uncommon in Chinese politics, where unity is emphasised. However, it is not entirely surprising that such conflict arises, especially facing pressing economic challenges.

A public finance practitioner under a pseudonym Qing Chi 青尺 responded to Xu Zhong 徐忠 People’s Bank of China (PBoC) research director’s criticism of Ministry of Finance (MoF) with rebuttal and ridicule, maintaining

  • strictly speaking, fiscal deficit cannot fully reflect the activeness of fiscal policy; Xu is wrong to assume inactive fiscal policy is solely based on fiscal deficit
  • capital injection by MoF into financial state-owned enterprises (SOEs) cannot come out of thin air because
    • fiscal balance sheet expansion is strictly limited; revenue and expenditure has to be based on real money
    • as long as the central government continues to service its debt, its capital injection into financial SOEs is real
    • MoF issued bonds are ultimately backed by taxpayers
    • MoF issuing government bonds to commercial banks and PBoC to alleviate liquidity strains is a common operation nowadays, this was the exact process of MoF capital injection into financial SOEs in 1998
    • alternatives at the time would have been more disastrous
  • financial institutions are by no means innocent of exacerbating the local government debt problem
    • financial institutions are complicit in helping local governments raise debt illegally; the complexity of financial product designs are incomprehensible to local fiscal departments
    • these products are undoubtedly designed to maximise benefits for financial institutions
    • rapid expansion of local government debt accompanies a great deal of high return and low-risk financial products, preventing financial resources from flowing into the real economy
  • PBoC’s self-positioning does not match China’s international status
    • while RMB internationalisation accelerates, its international status, marketisation of interest and forex rates do not meet expectations at home and abroad
    • strategic thinking still resembles that of a small country