Xi Jinping to China’s central bank: restart treasury-bond trade, after 2-decade hiatus
- President Xi has told China’s financial cadres that active monetary policy toolkit must include a controversial means of injecting liquidity into the economy
- Economist says PBOC has not bought treasury bonds for years because monetary authorities did not want to fuel market speculation of a major stimulus
It appears to be just a matter of time before China’s central bank pulls out a controversial monetary policy tool that it has not used in more than two decades, following newly publicised instructions from President Xi Jinping.
With the world’s second-largest economy at a critical juncture of fuelling growth in its bid to become a global financial superpower, a new book details some of Xi’s thoughts on finance, dating back to late 2012.
Of particular note are comments that Xi made to financial cadres during China’s twice-a-decade central financial work conference on October 30.
“It is necessary to enrich the monetary policy toolbox,” the snippet reads in Excerpts of Xi Jinping’s Speeches on Finance Work. “The People’s Bank of China must gradually increase the trading of treasury bonds in its open market operations.”
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Instructing the central bank to buy more treasury bonds is a rare and unexpected move in China. Sources say this last occurred around the start of the 21st century. After that, when the central bank sought to inject liquidity into the market, it started relying on relending tools and cuts to the reserve requirement ratio – reducing the amount of cash that commercial banks must hold as reserves and releasing large sums of money into the market as long-term liquidity.
In the five months since Xi’s instruction, public records indicate that the PBOC has not yet started buying treasury bonds in open market operations.
The practice itself is considered controversial because it fans the flames of concern over fiscal monetisation and the so-called modern monetary theory (MMT) that paved the way for Washington’s unprecedented quantitative-easing measures taken since the outbreak of the pandemic.
MMT posits that, if a government needs money in pressing times, it can freely print it, as long as the economy is capable of churning out goods and services.
And analysts suggest that once again buying bonds – when it happens – reflects how Beijing has become increasingly keen on utilising different monetary tools as wiggle room for conventional policy support is narrowing.
The PBOC must … safeguard the overall stability of the financial market
A strong central bank is one of the six key elements defining Xi’s financial-superpower vision.
In the new book, he regards the stabilisation of money supply as an important foundation for China’s finance work, calling for reasonably ample liquidity but more credit allocation for tech innovation, advanced manufacturing, green development and small businesses.
“The PBOC must implement monetary policy well and safeguard the overall stability of the financial market,” the president added at the financial work conference.
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Ding Shuang, chief Greater China economist at Standard Chartered Bank, said that the central bank’s expected purchase of government bonds in secondary markets – as their direct purchase is forbidden by Chinese laws – would be a good means of increasing liquidity, boosting economic activity and fostering the yield curve of Chinese treasury bonds. The yield curve depicts various bond yields over different terms to their maturity.
“It’s an easy and effective tool. But this is not the monetisation of fiscal deficit, nor [Western-style] quantitative easing,” he said, referring to the kind of bond-market purchases widely seen in developed markets.
Ding said the PBOC has refrained from buying treasury bonds for years because monetary authorities did not want to fuel market speculation of a major stimulus, but now Beijing is looking to inject a stronger dose of policy support and central bank funding.
“[The central bank] needs to do more work in communicating with the market,” Ding said.
Chinese authorities limited stimulus measures during and after the pandemic, with moderate cuts to market interest rates, the utilisation of structural tools, and the embracing of an accommodative liquidity policy.
Shao Yu, a board member with the Shanghai Institute for Finance and Development, said that unlike before, when the central bank focused on providing refinancing to commercial banks to support credit expansion, it is now shifting to more coordination of fiscal and monetary policies that are widely adopted in the world.
“But since fiscal monetisation is highly sensitive in China, I think we will start by trying little by little,” he said.
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Such a bond-buying plan became a focus of market discussions in 2018 and 2019, when analysts urged the central bank to do so against the backdrop of domestic economic challenges and MMT discussions prevailing in the United States.
PBOC governor Pan Gongsheng told a panel on Monday that China still has tools to ensure this year’s economic growth target.
“China’s average reserve requirement ratio is still at 7 per cent, implying an ample and important means of pumping liquidity into the market,” he said.
