(Bloomberg) — China’s Ministry of Finance said it supports allowing the central bank to trade government bonds, reaffirming a sentence from President Xi Jinping that ignited market speculation about a change of monetary strategy.
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The ministry called for stepping up coordination between fiscal and monetary policy and “improving the mechanisms of base money injection and money supply adjustment,” in an article written by a study group and published by the People’s Daily on Tuesday. It was based on a recent book that compiled Xi’s statements about finance and economics.
In that text, Xi was quoted as saying that the People’s Bank of China should gradually increase the buying and selling of government bonds in its open-market operations — a comment that set off a flurry of investor interest. Some analysts initially read it as signaling a policy of “quantitative easing” — the unconventional form of stimulus widely used by central banks in advanced economies over recent decades, but avoided by China.
Most experts disagreed, arguing instead that the idea was for the PBOC to have an additional tool to pump liquidity into markets and ensure interest rates are stable — in line with how major central banks like the US Federal Reserve operate. Currently the PBOC relies on other ways of managing liquidity such as lending facilities that inject cash into commercial banks, and reserve requirements.
The ministry’s latest comments come amid heightened focus on China’s borrowing plans. Beijing says it will sell more central-government debt to finance economic programs — a way of shifting the burden of stimulus away from financially strained local authorities.
It plans to offer 1 trillion yuan ($138 billion) of special sovereign bonds this year, although the timetable isn’t clear. The issuance will be launched in “timely” manner, an official at the Ministry of Finance said in a briefing Monday, refraining from giving a specific date.
Bond sales have been slow to roll out because authorities are still seeking suitable projects to spend funds they raised last year. The MOF comments suggest the government is in no hurry to provide more support for the economy, which could add to investor concerns that Beijing is underestimating the amount of stimulus it needs to provide, after first-quarter growth exceeded expectations.
China’s central bank hasn’t made a significant bond purchase since 2007. In a monetary policy report published in November, the PBOC contrasted its preference not to buy government bonds with the approach of the Fed and the Bank of Japan.
China’s commercial banks hold some 64% of sovereign bonds under funding support from the central bank, the report said — far higher than the share held by banks in the US and Japan, which is below 7%. The PBOC said it would push for more companies and individual investors to buy the government debt, helping to diversify the portfolio of holders and ensure smooth issuance.
–With assistance from Fran Wang.
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