Xi Jinping at the Chinese central bank: reviving Treasury bond trading after a 20-year hiatus

It is necessary to enrich the monetary policy toolbox, reads the extract Excerpts from Xi Jinping's speeches on financial work. The People's Bank of China is to gradually increase trading of Treasury bills as part of its open market operations.

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Asking the central bank to buy more Treasury bonds is a rare and unexpected move in China. Sources claim this happened in the early 21st century. After that, when the central bank sought to inject liquidity into the market, it began to rely on lending tools and reduce the reserve requirement ratio, thereby reducing the amount of liquidity that commercial banks must hold in reserve and releasing large sums of money into the market. long-term liquidity.

In the five months since Xi's instructions, public records indicate that the PBOC has yet to begin purchasing Treasuries through open market operations.

The practice itself is considered controversial because it fuels concerns about fiscal monetization and the so-called Modern Monetary Theory (MMT) that paved the way for Washington's unprecedented quantitative easing measures since the outbreak of the pandemic.

MMT posits that if a government needs money in times of crisis, it can print it freely, provided the economy is capable of producing goods and services.

And analysts suggest that once again, bond buying when this happens reflects how Beijing is increasingly willing to use different monetary tools as room for conventional policy support narrows .

A strong central bank is one of six key elements that define Xi's vision of a financial superpower.

In his new book, he sees the stabilization of the money supply as an important basis for China's financial work, calling for reasonably abundant liquidity but more credit allocation for technological innovation, advanced manufacturing, green development and small businesses.

The People's Bank of China should properly implement its monetary policy and safeguard the overall stability of the financial market, the president added at the financial working conference.

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Ding Shuang, chief economist for Greater China at Standard Chartered Bank, said central banks expect the purchase of government bonds in secondary markets, as their direct purchase is prohibited by laws Chinese companies, would be a good way to increase liquidity, stimulate economic activity and promote returns. Chinese Treasury bond curve. The yield curve represents various bond yields over different durations until maturity.

It is a simple and effective tool. But this is not a question of monetization of the budget deficit, nor of [Western-style] quantitative easing, he said, referring to the type of bond market buying widely seen in developed markets.

Ding said the People's Bank of China refrained from buying Treasuries for years because monetary authorities did not want to fuel market speculation about a major stimulus package, but that Beijing is now seeking to inject a stronger dose of political support and central bank financing.

[The central bank] needs to do more work in communicating with the market, Ding said.

Chinese authorities have limited stimulus measures during and after the pandemic, with moderate reductions in market interest rates, the use of structural tools and the adoption of an accommodative liquidity policy.

Shao Yu, a board member of the Shanghai Institute of Finance and Development, said that unlike before, when the central bank focused on refinancing commercial banks to support credit expansion, it is now moving towards greater coordination of fiscal and monetary policies which are widely adopted around the world.

But since fiscal monetization is very sensitive in China, I think we will start by trying it little by little, he said.

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Such a bond buyback plan became the focus of market discussions in 2018 and 2019, when analysts urged the central bank to do so amid domestic economic challenges and MMT discussions prevalent in the states. -United.

People's Bank of China Governor Pan Gongsheng told a panel on Monday that China still has tools to achieve its economic growth target this year.

China's average reserve requirement ratio is still at 7 percent, which implies ample and significant means of injecting liquidity into the market, he said.