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The Central Bank is Responsible for Pumping Water, the Ministry of Finance is Responsible for Patching Holes: Why China's Credit Machine Gets Louder the More It's Repaired
Author: The Fourth Wall of the Market
The market likes to refer to China's macroeconomic policy as "the central bank pumping water, and fiscal policy exerting force." This phrase sounds smooth. Once the tap is opened, construction sites should start moving. Once interest rates are cut, enterprises should borrow money. Once the Ministry of Finance issues bonds, demand should sit right up from the floor. Trading desks translate it this way every day, their tone as practiced as an old Chinese medicine doctor who prescribes a remedy after taking a pulse for just three seconds.
The reality is more like fixing water pipes in the middle of the night. The central bank squats on the ground looking at the water pressure, the Ministry of Finance holds the bills looking at which wall has cracked again, the banks stand to the side holding toolboxes, and local governments look down at their phones, pretending they aren't the previous renovation team.
There is water. But there are also plenty of holes.
In June 2024, Pan Gongsheng, Governor of the People's Bank of China (PBOC), stated at the Lujiazui Forum that China's monetary policy stance is supportive, and that the PBOC is creating a monetary and financial environment for high-quality economic development through measures like cutting the reserve requirement ratio (RRR), lowering policy interest rates, and driving down rates like the LPR. He also mentioned that the PBOC's efforts to govern idle funds and rectify manual interest supplementation would have a short-term "water-squeezing" effect on aggregate financial data.
This statement is very interesting. What the market hears is "supportive." The second half that the central bank adds is that water will be provided, but the dirty water must also be squeezed out.
The picture the Ministry of Finance sees is quite different. On November 8, 2024, Minister of Finance Lan Fo'an introduced at the press conference of the 12th session of the Standing Committee of the 14th National People's Congress that, starting in 2024, 800 billion yuan will be allocated annually for five consecutive years from new local government special bonds specifically for debt resolution, cumulatively replacing 4 trillion yuan of hidden debt; coupled with the 6 trillion yuan local government debt limit approved by the NPC Standing Committee, this directly increases local debt resolution resources by 10 trillion yuan.
This is not ordinary fiscal expenditure. This is performing surgical operations on local balance sheets.
Therefore, summarizing the contradiction between the central bank and the Ministry of Finance as "who is not cooperating with whom" is too naive. The true tension lies deep within credit. The central bank is rescuing liquidity, the Ministry of Finance is rescuing balance sheets, while the desire for credit creation is still lying in the hallway getting an IV drip. The central bank can make money cheaper, the Ministry of Finance can roll over old debts, and banks can pad their balance sheets a bit thicker. As for whether enterprises are willing to expand production, whether residents are willing to buy houses, and whether local governments have sustainable cash flow, these things do not take orders from reverse repos.
I. The Central Bank Watches the Water Pressure, the Ministry of Finance Watches the Bills
The central bank's job is not as romantic as the market imagines. It does not sit in front of a screen every day thinking about whether stocks should rise, nor is it the private psychotherapist for bond bulls. It is more like someone monitoring the water pressure of an entire building.
If the water pressure is too low, no one in the building is comfortable. If the water pressure is too high, old pipes will burst. What's more troublesome is that some tenants turn on the tap just to generate water meter readings, and then turn around to prove to property management how prosperous they are.
Pan Gongsheng put this very bluntly at the 2024 Lujiazui Forum. He mentioned that some financial institutions still have a strong "scale complex," achieving rapid scale expansion through involution and irrational competition. The PBOC's governance of idle funds and rectification of manual interest supplementation causes a short-term "water-squeezing" in aggregate financial data, but it is beneficial for improving the transmission efficiency of monetary policy.
The subtext here is very clear. Good-looking social financing and M2 data do not mean credit is truly effective. Water flowing through a meter doesn't mean rice has grown in the fields.
The Ministry of Finance sits at a different table. It doesn't look at the overnight repo rate, but at treasury bonds, local bonds, special bonds, transfer payments, the "three guarantees" (basic livelihood, wages, and operations), debt resolution, real estate inventory, and bank capital.
The Ministry of Finance's 2025 China Fiscal Policy Execution Report mentioned that the general public budget expenditure for 2025 is 28.74 trillion yuan; it smoothly issued 1.3 trillion yuan in ultra-long special treasury bonds, added 4.4 trillion yuan in local government special bonds, and issued 500 billion yuan in special treasury bonds to support large state-owned commercial banks in replenishing core tier-one capital.
The thickness of this bill can no longer be summarized simply as "spending more money to stimulate the economy."
When the market sees the four words "policy coordination," it easily imagines a synchronized pas de deux. In reality, it is closer to a late-night shift in a restaurant's back kitchen. Someone controls the fire, someone washes the wok, someone patches holes, and someone else is in the corner taking inventory of the bad debts left by the previous table.
II. Issuing Bonds Requires an Appetite; the Central Bank Fears the Market Will Treat Stomach Medicine as a Buffet Ticket
Fiscal expansion ultimately has to land in the bond market.
Treasury bonds must be issued, local bonds must be issued, special bonds must be issued, and ultra-long special treasury bonds must also be issued. These bonds won't disappear on their own; they need banks, insurance companies, funds, wealth management products, and the central bank's liquidity environment to digest them together.
The bond market is like a dining table. The Ministry of Finance is responsible for serving the dishes, and the central bank is responsible for making sure the guests don't choke to death.
On September 3, 2025, the joint working group of the Ministry of Finance and the PBOC held its second group leaders' meeting. Liao Min, member of the Party Leadership Group and Vice Minister of the Ministry of Finance, and Zou Lan, member of the Party Committee and Deputy Governor of the PBOC, attended. The meeting discussed topics such as financial market operations, government bond issuance management, central bank treasury bond trading operations, and the offshore RMB treasury bond issuance mechanism.
The literal meaning of this meeting is coordination. The deeper meaning read by the market is that government bond supply and central bank liquidity management have already sat down in the same meeting room.
Earlier, in August 2024, the PBOC began conducting treasury bond trading operations in the open market, net buying bonds with a face value of 100 billion yuan that month; operationally, it was buying short-term treasury bonds and selling long-term ones. The official statement was very cautious: the central bank's treasury bond trading is two-way, involving both buying and selling, positioned as a base money injection channel and liquidity management tool, and does not represent quantitative easing (QE).
The market will always translate policy into its own language.
When the central bank says "liquidity management," the market hears that someone is taking over the bag. When the central bank says "both buying and selling," the market fixates solely on the word "buy." When the central bank says "it's not QE," traders will first buy duration and then turn around to write a report explaining why this isn't QE but is still bullish for the bond market.
The most subtle part isn't how many treasury bonds the central bank bought, but whether the market will begin to believe that from now on, the central bank will front the bill for fiscal meals.
III. Money Can Become Cheaper, But Credit Might Still Be Thin
The central bank can provide many things.
RRR cuts can release long-term liquidity, policy rates can be pushed down, reverse repos can soothe the short end, structural relending can be directed toward tech innovation, technical transformation, consumer services, and elderly care, and treasury bond trading can supplement base money injection channels.
The 2025 Q2 Monetary Policy Execution Report mentioned that in May, the reserve requirement ratio was lowered by 0.5 percentage points, providing the market with about 1 trillion yuan in long-term liquidity; policy interest rates were lowered by 0.1 percentage points, structural monetary policy tool rates were lowered by 0.25 percentage points, and a 500 billion yuan service consumption and elderly care relending facility was established.
It looks like the toolbox is very full. But credit isn't a plant that grows just because the central bank presses a button.
Credit requires enterprises willing to borrow, residents willing to buy, banks willing to lend, and local projects having returns. It also requires future income not looking like an expired discount coupon. Money has become cheaper, but the cost of regretting borrowing money hasn't simultaneously decreased. When businesses cannot see orders, low interest rates are like a discount coupon outside a nightclub; even if you hold it, you might not go in.
Pan Gongsheng stated at the 2024 Lujiazui Forum that when monetary and credit growth has shifted from supply constraints to demand constraints, keeping the focus solely on quantitative growth clearly goes against the laws of economic operation. He also pointed out that real estate and local financing vehicle (LGFV) loans account for a large proportion of the nearly 250 trillion yuan loan balance; this segment is no longer growing and is actually declining. The remaining other loans must first fill this decline before showing up as an increment; it is very difficult to maintain total credit growth at over 10% as in the past.
These remarks are actually publicly dismantling a market illusion: credit growth cannot be dictated unilaterally by the central bank.
The money spent by the Ministry of Finance does not necessarily turn into new credit immediately either. The current function of many fiscal tools is to stop bleeding, replace debt, replenish capital, ensure the delivery of housing projects, and guarantee grassroots operations. These actions are necessary, and their effects are real, but they are more like patching old pipes than digging a new river.
Monetary easing is like turning up the AC in a hospital room. The patient might feel a bit more comfortable, but the fracture still requires a steel plate.
IV. Fiscal Policy Likes Low Interest Rates, the Central Bank Doesn't Want to Boil Price Signals into Mush
Fiscal policy naturally favors low interest rates. A slightly lower issuance cost for treasury bonds, a slightly more comfortable local debt replacement, a lighter interest burden for debt resolution, and a smoother arrangement for ultra-long duration funds. If government bond yields are as soft as a carpet, fiscal policy won't hurt its feet when walking.
Current Secretary of the Party Leadership Group and Minister of the Ministry of Finance of the PRC, Lan Fo'an, stated at the November 2024 press conference that the statutory debt interest rate is significantly lower than the hidden debt interest rate; after replacement, it can save local governments about 600 billion yuan in debt interest expenditure cumulatively over five years.
In a fiscal context, this statement is about reducing burdens; in a market context, it is a clear clue regarding interest rates. Debt resolution requires low-cost funds, and low interest rates are inherently a part of the debt resolution tool.
The central bank cannot entirely hand over long-end interest rates to fiscal desires. It has to look at bank net interest margins, term mismatches, the duration risk of non-bank institutions clustering together, and the RMB exchange rate.
At the 2024 Lujiazui Forum, when Pan Gongsheng discussed the interest rate regulation framework, he mentioned the need to gradually downplay quantitative targets and pay more attention to the role of price-based regulatory tools like interest rates. He also mentioned that the PBOC is strengthening communication with the Ministry of Finance to study incorporating treasury bond trading into the monetary policy toolbox, but this process is gradual, and aspects like the pace of treasury bond issuance, maturity structure, and custody system also need synchronous study and optimization.
The yield curve is sometimes like prices on a menu. Fiscal policy hopes the dishes are cheap, while the central bank hopes the menu still reflects the scarcity of ingredients and the costs of the kitchen. If long-end interest rates only reflect policy temperature, they are no longer prices but become a pacifier. Traders can fall asleep sucking on the pacifier, but the balance sheet won't grow teeth because of it.
V. Debt Resolution Needs Lighting; the Central Bank is Not Responsible for Making Old Furniture New
"Debt resolution" is the term most easily romanticized by the market in recent years.
Debt replacement, maturity extension, cost reduction, risk mitigation—it sounds like a professional cleaning job. The room is indeed clean, and the garbage bags are tied up. The problem is, the garbage didn't turn into roses.
On November 8, 2024, Lan Fo'an stated that this large-scale replacement signifies a fundamental shift in the approach to debt resolution: moving from emergency disposal in the past to proactive resolution, from isolated point-based mine-clearing to holistic risk removal, from the "dual-track" management of hidden and statutory debt to standardized and transparent management of all debt, and from a focus on risk prevention to equal emphasis on risk prevention and promoting development.
These words explain the fiscal intent very clearly. The mines must be taken out, labels must be attached, maturities must be swapped, and costs must be pushed down.
What the central bank provides here is lighting and air. Lighting means market liquidity cannot suddenly go dark. Air means the banking system cannot suffocate due to local debt pressures. The 2025 Q4 China Monetary Policy Execution Report mentioned that the PBOC must maintain ample liquidity and relatively loose social financing conditions, maintain financial market stability, and hold the bottom line of preventing systemic financial risks.
This is what the central bank can do. It can ensure the drawer doesn't suddenly pop open in the middle of the night, but it cannot turn the mines inside the drawer into chocolates.
When the market buys LGFV (Urban Construction Investment) bonds, it is often not buying project cash flows, but rather how long policymakers are willing to drag things out. This doesn't sound pretty, but trading desks know it in their hearts. The most valuable part of LGFV bonds isn't always found in the prospectus; it's often hidden in refinancing windows, debt resolution quotas, regional importance, and conference rhetoric.
To put it bluntly, it is the shadow of fiscal credit. When there isn't enough sunlight, a shadow can still provide warmth, just don't mistake the shadow for the sun.
VI. Banks Are the Tool Everyone Wants to Use
China's credit machine cannot bypass banks.
They have to buy government bonds, support local debt resolution, lend to the real economy, drive down corporate financing costs, cooperate with real estate project whitelists, while also maintaining net interest margins, controlling non-performing loans, and replenishing capital. A bank is like a relative called over to help you move: they move the sofa, front the cab fare, fix a lightbulb on the way, and in the end, the host still complains they aren't moving fast enough.
The Ministry of Finance's 2025 policy execution report mentioned the issuance of 500 billion yuan in special treasury bonds to support large state-owned commercial banks in replenishing core tier-one capital.
This move is crucial. It shows that policymakers also know banks are not supermen; if the gearbox of the credit machine is worn thin, pressing harder on the gas pedal will only produce an ugly grinding noise.
The central bank brought the health of banks to the table even earlier. Pan Gongsheng said at the 2024 Lujiazui Forum that monetary policy must coordinate and balance the relationship between supporting real economic growth and maintaining the financial institutions' own health. The 2025 Q2 Monetary Policy Execution Report also mentioned the need to balance financial support for the real economy with maintaining self-health, improving fund usage efficiency, and preventing funds from idling.
Why do bank stocks perennially act like a middle-aged person neglected by the market? Because they aren't just an equity story; they are also a labor dispatch for macroeconomic policy.
Policy dividends are delivered to their door, and policy costs walk in right alongside them. When interest rates drop, the market says banks benefit from economic stability. When net interest margins thin out, banks silently cough in their financial statements. They are not pure recipients of policy dividends; they are also the delivery drivers for policy costs.
VII. Fiscal Policy Wants Demand; the Central Bank Still Has to Watch the Wind Outside the Door
Fiscal policy cares more about whether there is anyone at the dinner table eating. Can consumption pick up, can corporate investment move, can infrastructure be deployed, can local spending recover, can young people find jobs. The language of fiscal policy naturally carries a sense of being on the ground, because it ultimately has to touch projects, construction sites, subsidies, public services, and household income.
On October 12, 2024, Minister of Finance Lan Fo'an introduced efforts to intensify counter-cyclical adjustments in fiscal policy at a State Council Information Office press conference, mentioning several arrangements: stepping up support for local governments to resolve debt risks, issuing special treasury bonds to support large state-owned commercial banks in replenishing core tier-one capital, overlaying local special bonds, special funds, and tax policies to promote the stabilization and recovery of the real estate market, and increasing guarantees for key demographic groups. He also stated that central fiscal still has considerable room to borrow and raise the deficit.
This is the tone of the fiscal side. The bill is heavy, but we still have to treat guests to dinner.
The central bank sits by the window seat and still has to watch the wind outside. The RMB exchange rate, US-China interest rate spreads, capital flow expectations, interbank leverage, idle funds, and asset price bubbles—none of these will automatically disappear just because domestic demand is insufficient.
Pan Gongsheng stated at the 2024 Lujiazui Forum that the PBOC adheres to the market's decisive role in exchange rate formation, maintains exchange rate flexibility, while strengthening expectation guidance and resolutely preventing the risk of exchange rate overshooting.
This sentence explains the "window" problem clearly. The room needs to be warm, but the window cannot be opened all the way.
Fiscal policy hopes money goes to the dinner table, while the central bank worries money will run toward the window. This isn't about who is conservative and who is radical. China's policy kitchen has outer walls; outside, there are dollar cycles, capital flows, and exchange rate expectations. When fiscal policy asks if things can be made a little cheaper, the central bank will first touch the window frame to see if the wind has picked up again.
VIII. The Old Credit Engine Has Stalled, the New Riverbed Hasn't Been Dug Deep Enough
The real contradiction is not between the central bank and the Ministry of Finance. They are just standing next to the same old machine, holding different tools in their hands.
The old machine used to run on real estate, land finance, local platforms, household leverage, infrastructure matching, and bank credit working together. When that setup was running, it was very loud, and everyone thought it was the heartbeat of growth. Only later did people realize that part of it was the sound of leverage grinding.
Pan Gongsheng admitted at the 2024 Lujiazui Forum that real estate and local financing platform loans are no longer growing, but rather declining, and other loans must first fill this decline to manifest as an increment. He also noted that macro-financial aggregates are already very large, with the stock of social financing exceeding 390 trillion yuan and the M2 balance exceeding 300 trillion yuan, making it natural for the growth rate of financial aggregates to decline somewhat.
These words aren't thrilling, but they are very important. They pull the market away from "why doesn't the central bank release more water" back to "where did the credit demand go?"
Lan Fo'an said in November 2024 that debt resolution can free up resources originally used to pay off debt to be used for promoting development and improving livelihoods; it can also improve the quality of financial assets, enhance credit provision capabilities, and benefit the real economy.
This represents fiscal policy's idea for a new riverbed. Only by first removing the rocks blocking the old pipes can water possibly flow to new places.
The problem is that removing the rocks does not mean a riverbed has already formed. New productive forces, technological innovation, green transitions, and high-end manufacturing can absorb some credit, but they will not drag households, local governments, banks, and upstream/downstream sectors into a wild sprint quite like the old real estate cycle did.
The old riverbed can no longer be flooded, and the new riverbed hasn't been dug deep enough. The central bank holds a water pump, the Ministry of Finance holds engineering blueprints, banks hold buckets, and local governments stand by saying they are just passing through. What is truly lacking is not liquidity, but rather the gradient that turns liquidity into credit, credit into income, and income into confidence.
IX. How Traders Should View This Machine
For interest rate bonds, look at the short end first. Seven-day reverse repos, the interest rate corridor, and funding liquidity fluctuations—the central bank has more direct control over these variables. The long end is more troublesome; it also has to look at fiscal supply, nominal growth, the pace of ultra-long treasury bonds, and institutional duration positioning.
In September 2024, Zou Lan, Director of the Monetary Policy Department of the PBOC, stated at a State Council Information Office press conference that the PBOC's trading of treasury bonds is mainly positioned as base money injection and liquidity management; it can both buy and sell, and by pairing it with other tools, it improves the precision of short, medium, and long-term liquidity management.
If traders only look at the word "buy," they can easily mistake the toolbox for a wishing well.
For LGFV (Urban Construction Investment) bonds, look at the shadow of fiscal credit. The 10 trillion yuan in debt resolution resources Lan Fo'an provided in November 2024 indeed reduced short-term tail risks and caused refinancing risks in many regions to be repriced. The narrowing of LGFV spreads is understandable, and the fading of panic is also understandable. But translating this into an assumption that all platform cash flows have suddenly become healthy treats policymakers too much like a God of Wealth.
Bank stocks and bank tier-2 capital bonds must be viewed on two levels. Replenishing core tier-one capital for large banks is support, and resolving debt to improve financial asset quality is also support. Low interest rates, conceding profits to the real economy, margin compression, and absorbing government bond supply will also remain on bank balance sheets.
The Ministry of Finance's 2025 report mentioned 500 billion yuan in special treasury bonds to support large bank capital replenishment, while central bank reports repeatedly emphasize the balance between financial support for the real economy and banks' own health. Policymakers know banks are a load-bearing wall, and they also know you cannot endlessly drill holes into a load-bearing wall.
Stocks are the easiest to be led astray by slogans. The central bank can fix valuations; only fiscal policy can potentially fix earnings. A drop in interest rates will make discount rates gentler, but only if fiscal expenditures enter household incomes, corporate orders, and local project cash flows will the earnings table slowly change. If there is only cheap money and no better businesses, the stock market is just a liquidity illusion wearing a suit.
Conclusion: This Meal Cannot Rely Solely on the Central Bank's One Wok
The market always wants to ask who is more important: the central bank or the Ministry of Finance. This question is like asking whether the fire or the wok is more important in a kitchen. Without fire, the food doesn't cook. Without a wok, the fire will just blacken the stove.
The trouble China is currently facing is not that the central bank lacks tools, nor is it that the Ministry of Finance is taking no action.
Since 2024, the central bank has talked about supportive monetary policy, governing idle funds, downplaying quantitative targets, and incorporating treasury bond trading into its toolbox. The Ministry of Finance has talked about 10 trillion yuan in debt resolution resources, special treasury bonds to replenish bank capital, and special bonds to support real estate and local balance sheets. Both sides are moving, and their movements are not small.
What is truly awkward is that the old main course—cooked up using real estate, land, platforms, and household leverage—can no longer be remade using the original recipe.
The Ministry of Finance is rearranging ingredients. The central bank is controlling the heat. Banks are carrying the plates. Local governments are still wiping up the spilled soup from the previous table. The market sits outside waiting to be served; smelling a little aroma makes them shout "bull market," and hearing a clatter of the wok makes them fear the kitchen is on fire.
A more mature trader knows that macroeconomic policy isn't chicken soup, nor is it a trading signal. It is more like a late-night kitchen shift. The lights are still on, everyone is very busy, the bill hasn't been settled, and all the dishes haven't been served yet.
This meal cannot rely solely on the central bank's one wok.