Chinese policy-makers warm to PBoC bond trading

China’s finance ministry said it backs plans for the People’s Bank of China (PBoC) to increase its trading of government bonds through open market operations, in order to “enrich the monetary policy toolbox”.

In an article published by the official People’s Daily on April 23, the finance ministry called for better co-ordination between fiscal and monetary policy, and improvements in the mechanisms for injecting base money and adjusting money supply.

The ministry’s call echoed a remark by Chinese president Xi Jinping at a high-level conference in 2023. The president’s remarks, not released at the time but published recently in a book, prompted some speculation over whether the central bank would introduce quantitative easing (QE).

Also on April 23, a senior official at the PBoC said the central bank could trade government bonds in the secondary market as a “monetary policy tool” and “a method to manage liquidity”.

Currently, the central bank mainly injects and withdraws liquidity from the financial system through its lending facilities, such as the medium-term lending facility, and adjusting the reserve requirements for financial institutions.

“China’s government bond market has become the third largest in the world and its liquidity has improved,” the official told a central bank-backed publication. “This makes it possible for the central bank to buy and sell government bonds in the secondary market.”

The official drew a distinction between QE and the PBoC’s trading of government bonds, saying future government bond-trading operations by the central bank would be “bilateral”.

“Some central banks in developed economies, having exhausted conventional monetary policy tools, were forced into large-scale, one-way purchases of government bonds to achieve monetary policy goals,” the official said. “In contrast, China adheres to normal monetary policy.”

They added: “The PBoC’s buying and selling of government bonds would be fundamentally different from those central banks’ QE operations.” 

According to China’s banking laws, the PBoC is not allowed to buy bonds directly from the central government.

Over the past month, Xi’s 2023 speech initially prompted some market analysts to speculate that the PBoC could begin large-scale liquidity injections through QE.

“The PBoC must slowly increase the trading of treasury bonds in its open market operations,” Xi said at the Central Financial Work Conference in October 20223.

However, the remarks appears to relate to the more standard open market operations many central banks use to control liquidity conditions, and thereby keep short-term market rates close to the policy rate.

The Chinese economy is facing difficulties including a property market downturn and deflationary pressures. But it still grew by 5.3% in the first quarter from a year ago, exceeding most analysts’ expectations.