background

Amid global economic turmoil, the recent actions of China’s central bank have attracted widespread attention. In particular, its policy of borrowing national debt and printing money without an anchor has raised concerns about inflation and financial stability. This article will delve into the background, risks and possible impacts of this policy.

The definition of anchorless money printing

Anchorless money printing refers to the central bank printing money to increase the money supply in the market without the support of real assets or foreign exchange reserves. This approach is often used to relieve short-term economic pressure or support government spending, but it may have negative effects such as inflation in the long term.

China's current situation

Faced with the dual pressure of slowing economic growth and the real estate market crisis, China's central bank began to adopt a more proactive monetary policy. Borrowing national debt and printing money without an anchor is seen as one of the means to stimulate the economy. However, this approach may lead to many risks.

At 1:10 pm on July 1, 2024, the Central Bank of China issued an announcement:

In order to maintain the sound operation of the bond market and based on careful observation and evaluation of the current market situation, the People's Bank of China has decided to conduct treasury bond borrowing operations in the near future against some primary dealers in the open market business.

After the announcement, Chinese government bond futures plummeted, with the main 30-year contract falling by 1.09% and the main 10-year contract falling by nearly 0.4%. A-shares also rebounded in the afternoon, with the Shanghai Composite Index rising 0.92% on Monday.

Inflation risk

The most direct risk of anchorless money printing is inflation. When there is too much money supply and the supply of goods and services fails to increase simultaneously, prices will rise, which is an invisible tax burden on ordinary consumers. China is already facing a certain degree of inflationary pressure, and unanchored money printing may worsen the situation.

financial market stability

Large-scale anchorless money printing may also affect the stability of financial markets. When investors lose confidence in a country's currency, capital flight will intensify, further weakening the country's economic foundation. The policy trends of China's central bank have aroused concerns among international investors and may lead to fluctuations in the capital market.

government debt problem

Borrowing national debt is also a cause for concern in its own right. Excessive national debt burden may affect the government's fiscal health and limit the space for future policy operations. The scale of China's government debt is already quite large, and further increase in debt may bring long-term fiscal risks.

international influence

As the world's second largest economy, China's monetary policy has an important impact on the global economy. If anchorless money printing triggers severe inflation or financial instability, it could have a knock-on effect on the global economy. For example, rising raw material prices will affect global supply chains and put pressure on the economic stability of other countries.

in conclusion

1. The anchor of RMB issuance has gradually changed from being anchored to foreign exchange reserves, mainly the US dollar, to treasury bonds.
2. The People's Bank of China decided to borrow government bonds from primary dealers to curb the overheating of the bond market and facilitate the return of funds to the stock market.

The People's Bank of China's unanchored money printing policy is a double-edged sword. Although it may stimulate the economy in the short term, the long-term risks cannot be ignored. Inflation, financial market turmoil and government debt problems are all potential crises that require vigilance. The government should adopt more robust and transparent policies to ensure sustainable economic development.