(Bloomberg) — China’s central bank chief said it is studying how to implement government bond trading with the finance ministry, while rejecting the idea the practice would equate to quantitative easing.
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Sovereign bond trading will be a gradual process, Pan Gongsheng, Governor of the People’s Bank of China, said at the Lujiazui Forum in Shanghai on Wednesday. He stressed the need to optimize the pace of sovereign bond sales and the debt’s tenor structure.
“Including government bond buying and selling into the monetary policy toolbox doesn’t mean we’ll do quantitative easing, but rather it’s a tool for for injecting base money and regulate liquidity,” said Pan, referring to the once-unorthodox central bank policy of buying government bonds to stimulate the economy.
“It will be both buying and selling, and combined with other tools it will create an accommodative liquidity environment,” he said.
The remarks come as expectations are growing that the PBOC will start purchases and sales of government bonds, after comments made public this year indicated that President Xi Jinping called for such a tool to regulate liquidity during a major financial meeting last year. However, there have been few details on how this may be done and when it may begin.
In addition, a months-long bull run in government bonds also dented any need for immediate central bank bond buying. Indeed, the PBOC has issued repeated warnings against the bond rally, and a newspaper it manages said the monetary authority could step into the market to sell bonds if demand for the haven assets continues to rise.
China’s 10-year yield inched up to 2.26%, erasing an earlier drop as Pan spoke. The offshore yuan was little changed at 7.27 per dollar.
Pan said the practice of central bank injecting base money via buying and selling sovereign bonds in the secondary market is already a mature one.
He also signaled there is more room to ease monetary policy as other economies are pivoting to cut rates this year. The appreciation momentum of the dollar is weakening, which will help keep the yuan stable and expand the room for China’s monetary policy, he said.
The PBOC earlier this week left its one-year policy interest rate unchanged for the 10th straight month, reflecting caution on monetary easing given abundant liquidity and the pressure to prevent the yuan from weakening further. The premium that US 10-year government bond yields have over Chinese notes rose to a record in April — making Chinese assets less attractive, and spurring capital outflows — and it’s only narrowed moderately since then.
Economists expect China to reach its official target of around 5% growth this year thanks to strong momentum from exports-led industrial activities. But the economy still faces challenges from a prolonged property downturn, persisting deflation and sluggish domestic demand. On top of that, trade tensions with the US and Europe are rising, which could undermine the prospects of exports.
Market has been watching out for further actions from the central bank to cool down the bond rally. China’s 10-year government bond futures closed at a record high this week, while 30-year sovereign yields fell below 2.5% on Tuesday, breaching the “reasonable range” of 2.5%-3% previously laid out by Financial News, a PBOC-managed newspaper.
(Updates with more details and Pan’s comments)
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