Xi Jinping to the central bank: we need to start buying government bonds on the open market again
It seems like it's only a matter of time before China's central bank pulls out a controversial monetary policy tool that it hasn't used in over two decades, in obedience to President Xi Jinping's recently released instructions.
With the world's second-largest economy at a critical stage of fueling growth as it seeks 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 Xi made to financial executives during China's central financial work conference, held on October 30. “It is necessary to enrich the toolbox of monetary policy,” we read in Excerpts from Xi Jinping's speeches on financial work. “The People's Bank of China must gradually increase trading of Treasury securities in its open market operations.”
The order for the central bank to buy more Treasury bonds is a rare and unexpected move in China. According to sources, the last time it happened was at the beginning of the 21st century. After that, as the central bank sought to inject liquidity into the market, it began to rely on lending facilities 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 in the market as long-term liquidity. It has never operated on the open market by buying government bonds as commercial banks did and do and as the Japanese Central Bank traditionally does.
In the five months since Xi's instructions, public documents indicate that the PBOC has yet to begin buying Treasury bonds in open market operations, all in a curious moment of caution, even in failing to comply with the leader.
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 the unprecedented quantitative-easing measures adopted by Washington after the outbreak of the pandemic. MMT argues that if a government needs money in difficult times, it can print it freely, as long as the economy can produce goods and services.
The problem is that China has set itself a 5% growth target which, according to government officials, will require hard work and which, according to many analysts, will not be possible without further monetary stimulus. Ding Shuang, chief economist for Greater China at Standard Chartered Bank, said the central bank's planned purchase of government bonds in secondary markets – as their direct purchase is prohibited by Chinese laws – would be a good means of boosting liquidity , stimulate economic activity and favor the yield curve of Chinese Treasury securities. The yield curve depicts various bond yields based on different maturity terms.
“It's an easy and effective tool. But this is not monetization of the fiscal deficit, nor [Western-style] quantitative easing,” he said, referring to the kind of bond buying seen widely in developed markets.
Ding said the PBOC had refrained from buying Treasuries for years because monetary authorities didn't want to fuel market speculation about a big stimulus, but now Beijing is trying to inject a stronger dose of political support and support. central bank financing.
Eventually China would become much more like Japan, with continued market intervention to control the interest rate.
An almost expected evolution which in any case would not be inconsistent with Xi inping's dictate which also requires the regulation of financial markets.
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The article Xi Jinping to the central bank: we need to start buying government bonds on the open market again comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/xi-jinping-alla-banca-centrale-bisogna-ricominciare-a-comprare-titoli-di-stato-sul-mercato-apertorecen/ on Thu, 28 Mar 2024 08:00:27 +0000.