Speed up Fiscal deficit monetization?then


During these 2 days,the biggest breaking news from Financial circle in China,was absolutely about Sun Guofeng, head of the monetary policy department at the People’s Bank of China (PBOC), was removed from office on Wednesday and is now subject to a disciplinary review and supervisory investigation on suspicion of “serious violations of discipline and the law” — a common euphemism for corruption.

Regardless of exact accusations he is facing,this unusual move could largely lead to drastic U turn on monetary policy conducted by PBOC in the near future,the precise upcoming trend could be Summarized into 3 key words,“Fiscal deficit monetization”,then,what are the possible outcomes as followed with High probability?sharp and continuous USDCNH hikes,even with neg nominal interest rate related to speeding-up massive adoption on DCEP.

Firstly,in order to combat with sedimented mounted debts,after this particular event,PBOC may largely give up its relatively neutral and prudential approaches,then drastically shift to monetize Fiscal deficit,though officially the gvt budget deficit target for 2022 was set at around 2.8% of gross domestic product (GDP), compared with last year’s target of around 3.2% of GDP,but with the inner total retail sales volume of consumer goods was hammered down with YoY decrease of 11.1% in April,and same month total RMB loans volume with a decrease of 23% from the previous month and a decrease of 47% YoY(from offical released datas),to stablize the market orders,PBOC has no other better choice but to pump even more Liquidity to support the same old infrastructure buildings,even with Average local government debt ratio already surpassing 100% around Dec 2021,just one small step away from the Internationally recognized red line,the latest Mortgage interest rate cut(20bp down from >5Y LPR) supported this point.

The Impossible Trinity

Secondly,with prognostication on dwindling in exports,integrated with The Impossible Trinity theory,PBOC certainly not able to ditch its established monetary policy,meanewhile shrinking trades related current account surplus determined even tighten capital flows,hence,RMB exchange rate would fluctuate even Closer to the dynamic changes about FX market demand VS supply,thus,USDCNH may largely around 6.8000 ups and downs,RMB Depreciation expectations high.

China’s DCEP two-tiered issuing system

At last,from previous published papers,dudes from PBOC already openly propagated the relations between “neg nominal interest rate” and “massive adoption on DCEP”(seen on PBC WORKING PAPER NO.2018/2,April 3 2018),cos in the beginning, DCEP was designed to replace M0,and it adopted indirect two-tiered issuing system.To be elaborated,The first tier would be transactions between the PBoC and intermediaries. These intermediaries would be financial institutions (e.g. the 4 major state-owned banks i.e. China Construction Bank, the Agricultural Bank of China, Bank of China and the Industrial and Commercial Bank of China) and non-financial institutions such as Alibaba, Tencent and UnionPay. Here, the PBoC would issue DCEP to the intermediaries.

The second tier would be between the above-mentioned intermediaries and participants in the retail market such as companies (e.g. retail stores) and individuals like you and I. In this tier, the intermediaries that have received DCEP will distribute it to the retail participants so that it would circulate through the market e.g. through people buying things at stores etc.

The main difference in the issuance and distribution of DCEP compared to traditional cash however is the fact that DCEP would be transferred through electronic wallets, rather than bank accounts.Morever,the DCEP 1st tier intermediaries wont need 100% solid reserve ratio as promoted,in reality,DCEP would took over M1 position as its running heavily depended on the 1st tier intermediaries AKA inancial institutions to settle retailing transfers with final users,In general At the core,DCEP means PBOC directly in debts with final retail participants,compared to traditional cash & current Commercial Bank Deposit Reserve mechanism,PBOC could directly issue,Convert,retrieve and most importantly monitoring in real time on the currencies common dudes are holding,now,U finally understand why PBOC dudes so enthusiastic about clarifying the tempting connection between “neg nominal interest rate” and “DCEP ”,quite interesting,huh?