“The size of China’s sovereign bond market ranks third in the world and liquidity has improved significantly, providing an opportunity for the central bank to transact sovereign bonds in the secondary market,” said the head of the People’s Bank of China.
Despite the bank’s typically cautious wording, analysts say this could represent a significant change in approach.
“If the central bank increases its purchases of government bonds to inject money in the future, it may not be a simple addition to monetary policy, but a change in policy major,” Huajin Securities said in a note published Wednesday.
Xi Jinping outlines plan to make China a ‘financial superpower’, warns of risks
Xi Jinping outlines plan to make China a ‘financial superpower’, warns of risks
The People’s Bank of China’s comments followed an article published earlier the same day in the party’s mouthpiece, the People’s Daily. In this latest article, the Finance Ministry said it would support a “gradual increase” in purchases and sales of government bonds.
Citing unnamed experts, the central bank also said the Finance Ministry’s issuance of treasury bills should be “large enough” and at a “stable pace” to be effective and avoid unexpected volatility in bond rates. interest.
But the PBOC’s goal in trading Treasuries is different from that of central banks in developed countries, the unnamed PBOC official added.
“When central banks in some developed economies have exhausted their conventional monetary policy tools, they are forced to purchase Treasuries on a large scale to achieve their monetary policy goals,” the official said.
The contrast with quantitative easing policies was noted by analysts at Everbright Securities, who agreed with the PBOC official that any potential trading in Treasuries would include both buying and selling, unlike other central banks that only make purchases.
Analysts at Tianfeng Securities said in a note on Wednesday that trading Treasury bills over a long period can be seen as an easing measure similar to reducing the reserve requirement ratio – the proportion of their cash that banks are required to be kept in reserve. . Lowering this minimum is a way to increase the liquidity of the economy without resorting to direct exchanges.
The law prohibits the People’s Bank of China from purchasing Chinese government bonds in primary markets, but no such ban has ever been implemented against the buying and selling of these debt securities on the secondary market.
China’s economy beat expectations in 2024, growing 5.3% in the first quarter year-on-year, laying the foundation for meeting Beijing’s annual target of around 5%.
China Sells More U.S. Treasuries as Fed Signals Low Interest in Rate Cuts
China Sells More U.S. Treasuries as Fed Signals Low Interest in Rate Cuts
Zhang Monan, deputy director of the Institute of American and European Studies at the China Center for International Economic Exchanges, is among the advisers proposing less orthodox methods to handle the situation.
She said China could adopt some practices used by the United States to overcome economic crises throughout history, most recently the coronavirus pandemic.
“Dirty talk” about debt can now take on a new and different perspective
“In the context of the new political cycle and the new economic cycle, we can liberate our minds and break stereotypes, especially because we have entered a different stage of development and we can change our views on some traditional issues” , Zhang said at a forum in Beijing. Sunday, organized by the think tank Huaxia New Supply Economics Research Institute.
“So-called dirty talk about debt can now have a new and different perspective. »
Beijing has been reluctant to expand its fiscal policy, preferring one-off measures such as issuing special Treasury securities. It has delegated much of its borrowing to local governments, much of which is off-budget – meaning it will not affect this year’s budget deficit ratio, currently pegged at 3 percent of gross domestic product.
China cuts bank reserve requirement ratio ahead of August data release
China cuts bank reserve requirement ratio ahead of August data release
In China’s planned 2024 budget, Treasury debt increased by only 180 billion yuan ($24.8 billion) from the previous year. The central government said it would sell an additional 1 trillion yuan worth of special ultra-long-term Treasury bonds this year, another off-budget measure.
Compared to the European Central Bank – which holds around 65 percent of the Treasury debt issued by euro zone countries – China’s Treasury debt represents less than 5 percent of the PBOC’s assets, according to the think tank based in Beijing National Institution for Finance. and Development (NIFD).
“We still recommend that the central government’s budget deficit and the size of the Treasury’s debt be moderately increased for a long period to come,” the NIFD said in a report on Sunday.
After the US Federal Reserve promised an “unlimited” expansion of purchases of US Treasuries and mortgage-backed securities in 2020 – and Congress approved the largest-ever infusion of federal cash in the same year – the US economy contracted 31.4 percent in the second quarter. . But since then, he has bounced back.
“This [coordination] It’s a relatively mature experience in many countries in the three years since the pandemic,” said Zhang, who worked with the National Development and Reform Commission, China’s top economic planner. “[It avoids] deleveraging in the private and residential sectors, with more leverage from central banks and ministries. This is worth discussing.
