China's central bank has again reiterated its cautious approach to monetary easing, reinforcing views that it's unlikely to deliver a big liquidity boost via bond trading.
Officials from the People's Bank of China told the state-run Financial News that the central bank will stick to normal monetary policy tools, but broke weeks of silence about treasury bond trading, a policy tool it has used sparingly in the past two decades. A months-old speech from President Xi Jinping had stoked speculation that the PBOC could resume trading treasury bonds in secondary markets.
The PBOC stressed that its trading of treasury bonds is fundamentally different from the quantitative easing operations conducted by other central banks, which involve loading up on assets like government bonds to push down yields after exhausting more traditional policy means.
The comments came shortly after China's finance ministry voiced support for the central bank to resume treasury-bond trading.
Some analysts view the ministry's remarks as applying pressure on the bank to act, given the history of clashes between fiscal and monetary policy makers in the country.
The bubbling debate also comes against a backdrop of a decline in China's long-term treasury bond yields. PBOC officials said in the interview that while yields mainly reflect expectations for long-term economic growth and inflation, they are also influenced by factors like supply and demand.
The PBOC-affiliated newspaper quoted unnamed market participants as saying yields could be declining due to the lack of "safe assets" on the market, hinting that the central bank has provided enough liquidity to the bond market. Beijing's planned issuance of ultralong special government bonds could alleviate this situation and help prop up yields, the paper said.
Analysts quoted by the state-run Xinhua news agency showed differing takes on the matter. Tan Yiming, an analyst at Minsheng Securities, said the PBOC can buy treasury bonds to better coordinate with fiscal policy makers, while Ming Ming, a CITIC Securities economist, said maintaining independence in the central bank's budget system serves as a "firewall" between the finance ministry and central bank.
The PBOC isn't allowed to directly trade government bonds on the primary market and has generally refrained from doing so in secondary markets. Instead, the bank injects liquidity via various lending facilities to financial institutions using government bonds as collateral, and has often lowered the amount of cash banks must hold as reserves.
While there is still room for such trims, economists say it has become increasingly narrow.
Policymakers could again be talking about treasury bond trading as a liquidity-management tool because reserve requirement ratios are already at relatively low levels, and foreign-exchange reserves have largely been flat, CreditSights senior director Zerlina Zeng told Dow Jones Newswires.
?The PBOC manages liquidity mainly via the money base, including FX reserve accumulation and newer instruments like the medium-term lending facility, as well as the money multiplier, or RRR, Zeng said.
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(END) Dow Jones Newswires
04-24-24 0134ET
