There is no need for the central bank to activate quantitative easing, said Sun Guofeng, director of the Monetary Policy Committee at the People’s Bank of China. He was responding to recent discussions about whether the PBOC can directly buy stocks and purchase government bonds, or even needs QE, Securities Daily reported.

QE, also known as large-scale asset purchases, is an expansionary monetary policy whereby a central bank buys government bonds or other assets to stimulate the economy and boost liquidity.

According to Sun, QE is usually a measure taken by an economy mainly driven by financial markets. Sun pointed out that China is typical of a bank-led financial system.

Therefore, to facilitate monetary policy, the transmission mechanism will rely on regulating banks behaviors. Thus, the PBOC does not need to invoke QE, Sun said.

Sun also warns that if the PBOC purchases a large number of Chinese government bonds in the secondary market, it is equivalent to buying them in the primary market directly, which could easily lead to a monetized deficit and trigger inflation.

Asia Times has relaunched on www.asiatimes.com . Download the new App here.