China’s central bank treasury-bond trade restart ‘now certain’ as discussions deepen between monetary, fiscal agencies
- State media article on Wednesday says it is ‘certain’ that China’s central bank will participate in treasury bond trading amid better coordination with the finance ministry
- An instruction by President Xi Jinping that was only made public in March had fuelled speculation over an aggressive easing of monetary policy
A first purchase in over 20 years of treasury bonds in the secondary market by China’s central bank is seemingly approaching, regardless of market concerns over quantitative easing, after state media on Wednesday stepped up suggestions of improved coordination by the People’s Bank of China and the finance ministry.
“As it is now certain for the central bank to participate in treasury-bond trading, the coordination of treasury-bond issuance pace and monetary policy operations will become challenging in aligning fiscal and monetary policy,” the Securities Times, a financial newspaper under the People’s Daily, wrote on its front page.
It is the first in a series of articles that the newspaper plans to run to discuss the room, mechanism and specific ways of cooperation between the PBOC and the Ministry of Finance.
On the fiscal side, it is necessary to further optimise the maturity structure and issuance pace of government bonds
“It places higher demands on the depth and price formation mechanism of the government bond market,” the Securities Times added.
Beijing, though, has denied a Western-style quantitative easing, saying its bond purchases are a way for Beijing to refine its monetary policy tools.
The purchases will also not lead to monetisation of the fiscal deficit, as China’s central bank is still forbidden from buying bonds directly from the finance ministry.
But domestic analysts have been expecting a start of a new money supply mechanism, rather than a wide use of the tool in the short term.
The central bank’s daily monetary operations are being closely watched, as the finance ministry said in late April that it would soon start to sell the 1 trillion yuan (US$138 billion) of ultra-long special treasury bonds mentioned by Premier Li Qiang at the “two sessions” annual parliamentary meeting in March.
About 722 billion yuan of new special bonds have been issued this year, according to Chinese financial data provider Wind.
The PBOC had earlier raised concerns that the yield of its long-term bonds had dropped too much, as the returns on its 10-year government bonds had dropped from 2.74 per cent a year earlier to 2.28 per cent last month.
Coordinated issuance of government bonds would be beneficial to avoid a liquidity shock in the second and third quarters, the Securities Times said.
Previously, the central bank would inject more liquidity into the interbank market through a variety of tools, enabling market players to buy government bonds.
The government should increase the sales of ultra-short, short-term and ultra-long-term special treasury bonds as the current structure would constrain central bank operations, the newspaper added on Wednesday.
