Bond Trading by China PBOC's Wouldn't Be Quantitative Easing, Governor Says

Trading in bonds by China's central bank wouldn't be a form of massive monetary easing, according to its governor, as he responded to speculation that Beijing is eyeing the unconventional policy tool to prop up the economy.

The People's Bank of China and the finance ministry are studying ways to include treasury bond trading in its policy toolkit, said PBOC governor Pan Gongsheng in a finance forum on Wednesday. He rejected the notion that the practice would be equivalent to quantitative easing, when monetary authorities load up on assets like government bonds to push down yields after exhausting more traditional policy tools.

Instead, the PBOC's bond trading will be a liquidity management tool involving both buying and selling, Pan said. Such trading would be a gradual process, and the pace of issuance, maturity structure and custody mechanism for China's treasury bonds will also need to be optimized, he added.

Pan's comments came as a speech from President Xi Jinping in October stoked speculation in recent months that the PBOC could resume trading treasury bonds in secondary markets, a policy option the bank has rarely adopted over the past two decades.

China's central bank 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 into the system 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 scope to trim those reserve requirements, economists say it has become increasingly narrow, necessitating more-frequent bond trading by the PBOC.

Markets have been watching for signs of PBOC bond purchases since President Xi's speech, but it looks like it may enter the market as a seller instead, to tame an extended rally in bonds. The PBOC-affiliated Financial News reported late May that the central bank will sell treasury bonds when necessary and that falling yields mean it isn't a good time for the bank to buy.

The PBOC has stepped up warnings about the fall in China's long-term yields in recent months. Yields have been pushed to record lows as bonds rally on safe-haven demand amid the slump in the property sector and stock-market volatility.

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June 19, 2024 00:57 ET (04:57 GMT)

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