The central bank’s purchase of government bonds is not QE, nor is it monetization of fiscal deficits – Wall Street Insights

In the past month, the topic of the central bank’s purchase of government bonds has attracted market attention, and the Ministry of Finance and the central bank have also made their latest statements on this issue.

On April 23, the Theoretical Learning Center Group of the Party Leadership Group of the Ministry of Finance published an article in the People’s Daily stating that to deepen the structural reform of the financial supply side, we must strengthen the coordination of fiscal and financial policies. The article mentioned that in terms of meso-level mechanisms, it is necessary to strengthen the coordination and cooperation between fiscal and monetary policies and financial reforms, improve the base currency injection and money supply control mechanisms, support the gradual increase in the purchase and sale of government bonds in the central bank’s open market operations, and enrich the monetary policy toolbox.

On the same day, the relevant person in charge of the central bank pointed out in an article in response to a reporter’s question from the Financial Times that the central bank’s purchase and sale of treasury bonds in the secondary market can be used as a liquidity management method and monetary policy tool reserve.

Industry insiders believe that the Central Financial Work Conference proposed that “it is necessary to enrich the monetary policy toolbox and gradually increase the buying and selling of treasury bonds in the central bank’s open market operations.” China’s treasury bond market has ranked third in the world in size, and its liquidity has significantly improved. This is the central bank’s second choice. It provides the possibility to carry out treasury bond spot buying and selling operations in the secondary market. At the same time, the central bank’s purchase of bonds in the secondary market will also help alleviate the liquidity pressure caused by subsequent supply pressures such as special government bonds and additional issuance of government bonds, and effectively promote the development of the real economy through the combination of fiscal policy and monetary policy.

“In the future, the central bank’s treasury bond operations will be two-way”

According to Article 29 of Chapter 4 of the “Law of the People’s Republic of China on the People’s Bank of China”, the People’s Bank of China is not allowed to overdraft the government’s finances, and is not allowed to directly subscribe or underwrite treasury bonds and other government bonds. This means that the central bank is not allowed to directly subscribe for treasury bonds in the primary market, but this clause does not exclude it from buying and selling treasury bonds in the open market.

Article 23 of the aforementioned law states that in order to implement monetary policy, the People’s Bank of China may purchase and sell treasury bonds, other government bonds, financial bonds and foreign exchange in the open market. That is to say, from the perspective of legal system arrangements, buying and selling treasury bonds can become a necessary supplement to open market operations, and the current system also allows it.

Ming Ming, chief economist of CITIC Securities, told Xinhua Finance, “Faced with China’s economy facing problems such as insufficient private sector demand and high local debt pressure, it is imperative for the central government to increase leverage. This year, the Ministry of Finance has made it clear that it will issue trillion-level special government bonds. . However, the central fiscal expansion will have some market impacts. On the one hand, increased government bond issuance will inevitably raise the interest rate of government bonds and increase the pressure on the central government to pay interest. On the other hand, government debt financing will squeeze the financing space of the private sector, and the space for corporate bond issuance may be reduced. Restricted.”

“If the central bank chooses to purchase bonds in the secondary market, on the one hand, it will alleviate the problems of rising issuance interest rates and squeezing the issuance space of credit bonds caused by the large-scale issuance of government bonds. On the other hand, it will also release a wide range of liquidity through fiscal expenditures. , It has played a supporting role in the real economy,” Mingming further explained.

From a global perspective, it is an international practice to use the purchase of government bonds as a tool for base currency injection. For example, the Federal Reserve uses a reverse discriminatory auction to purchase government bonds; the Bank of Japan not only purchases government bonds, but also adds a new private sector financial asset purchase plan. After the outbreak of the European debt crisis, the European Central Bank announced the purchase of asset-backed bonds and guaranteed bonds. Among the three purchase plans, the ECB’s public sector purchase plan is the largest and more effective.

In the history of our country, there have been few cases of the central bank directly purchasing government bonds. In 1996, 2.9 billion yuan of treasury bonds were purchased from 14 commercial banks to inject base currency. From 2002 to 2003, liquidity was adjusted by buying and selling treasury bonds. In 2007, the Ministry of Finance issued 1.55 trillion yuan of special treasury bonds to establish China Investment Corporation, of which 1.35 trillion yuan of special treasury bonds were issued to the Agricultural Bank of China. The central bank used the 1.35 trillion yuan obtained from foreign exchange sales to purchase special treasury bonds of the same value from the Agricultural Bank of China.

According to data from Minsheng Securities, as of February 2024, the central bank holds approximately 1.52 trillion yuan in treasury bonds, accounting for 5% of the current 30.2 trillion yuan stock of treasury bonds. It accounts for a relatively small amount, and the majority of them are special treasury bonds, accounting for approximately 1.35 trillion yuan. Yuan refers to the special treasury bonds issued in 2007. The subsequent purchases in 2017 and 2022 are mainly the part of the 2007 special treasury bonds that expired and were renewed. If the 1.35 trillion yuan in special government bonds are deducted, the central bank’s direct purchase of government bonds from the secondary market would be only 174.1 billion yuan.

Tan Yiming, chief analyst of fixed income at Minsheng Securities, told Xinhua Finance that although China allows the central bank to buy out treasury bonds in the secondary market, judging from the actual situation, the central bank’s overall operations are more cautious, and the several purchases of treasury bonds are mainly to cooperate with special treasury bonds. issuance, which reflects the coordinated linkage of fiscal and monetary policies. From a mid- to long-term perspective, the central bank’s purchase of government bonds is an expansion and optimization of monetary policy tools, and it is also an inevitable requirement for coordination and cooperation with finance. However, the whole process may be mild and gradual.

In response to the view that “my country’s central bank’s purchase of government bonds means that the ‘quantitative easing (QE) operation’ is about to begin”, industry insiders generally believe that my country’s central bank’s bond purchase is not equivalent to QE, and is fundamentally different from the monetization of fiscal deficits.

We should also note that when the central banks of some developed economies have exhausted their conventional monetary policy tools, they are forced to purchase treasury bonds on a large scale to achieve monetary policy goals. However, our country insists on implementing normal monetary policies. The People’s Bank of China buys and sells treasury bonds in conjunction with these The central bank’s QE operations are completely different.

“We cannot simply determine whether it is QE by purchasing government bonds or not.” Wen Bin, chief economist of China Minsheng Bank, said that unlike the policy arrangements and logic of QE and fiscal deficit monetization in Western countries, China mainly relies on indirect financing. The credit interest rate used to be the benchmark interest rate set by the central bank. If the government bond yield curve is changed through QE, the change in the curve will not directly affect the credit interest rate. In the future, more reference will be made to the loan market prime rate (LPR).

Fiscal and monetary policies are effectively combined and my country’s financial tool policy box is fully stocked.

Generally speaking, fiscal policy and monetary policy should each use their effective policy tools to contribute to achieving common macroeconomic policy goals, stabilizing the macroeconomic market, ensuring people’s livelihood, and stabilizing employment. The two policies are both independent of each other and coordinated. Only in this way can good policy effects be achieved.

Judging from the actual situation in our country, proactive fiscal policies have made every effort to expand domestic demand through means such as the tax refund policy for excess tax credits, the issuance of local special bonds, tax incentives for super deductions for technology research and development expenses in related industries, and the steady expansion of government and private investment. Focusing on precision and sustainability, it plays an important role in improving quality, efficiency, and structural adjustment; while prudent monetary policy focuses on protecting liquidity, is generally moderate, and implements a model that combines aggregate volume and structural regulation in policy selection.

The aforementioned person in charge of the People’s Bank of China said that the central bank’s purchase and sale of treasury bonds in the secondary market can be used as a liquidity management method and monetary policy tool reserve. The Central Financial Work Conference proposed that “it is necessary to enrich the monetary policy toolbox and gradually increase the buying and selling of treasury bonds in the central bank’s open market operations.” China’s treasury bond market has ranked third in the world in size, and its liquidity has increased significantly. This provides the basis for the central bank to carry out treasury bonds in the secondary market. Spot bond buying and selling operations provide the possibility.

Regarding the reasons and pace of recent frequent announcements of bond purchases by regulatory authorities, combined with the issuance of special treasury bonds in the second quarter of this year, it may cause certain disturbances in funding and market sentiment. This move is intended to give sufficient support to the issuance of special treasury bonds. Liquidity support.

Mingming pointed out that “the central bank’s purchase of treasury bonds may be mainly to maintain the smooth operation of funds, and subsequent bond purchases may coincide with the issuance of special treasury bonds by the Ministry of Finance to release liquidity through both monetary and fiscal channels, and alleviate the peak supply of government bonds.” Impact on the interbank liquidity market.”

Wen Bin also said that the central bank may buy and sell treasury bonds for two purposes: first, to adjust currency injection to meet the growth of money demand in economic development, or to absorb remaining liquidity; second, to lower long-term interest rates and compress term premiums to encourage Medium and long-term credit extension may boost asset prices.

At present, market liquidity is still relatively abundant, capital interest rates are basically running stably around the policy interest rate, and the monetary policy toolbox is rich in content. Quantitative tools such as reserve requirement ratio cuts and price-based tools such as interest rate cuts still have large room for operation. At the same time, the principle of my country’s monetary policy operation is not to engage in flooding and excessive currency issuance, but to pay more attention to the health of the balance sheet and inflation expectations.

In this regard, Tan Yiming said, “Although there is still room for lowering the reserve requirement ratio, it has become increasingly narrow, and the central bank’s bond purchases can be used as a channel for base currency injection to achieve the role of ‘enriching the monetary policy toolbox.’ At the same time, in fiscal and monetary coordination In the context of the plan to issue ultra-long-term special treasury bonds for several consecutive years starting from this year, the subsequent central bank purchases of treasury bonds can better coordinate with the fiscal system.”

“In the future, when the central bank participates in treasury bond transactions, the independent central bank financial budget management system will continue to be implemented, building a ‘firewall’ between the two ‘money bags’ of the fiscal and central bank.” Mingming added.

Talking about the impact of the central bank’s bond purchases, Tan Yiming said, “If the central bank increases the purchase of special government bonds, it will weaken the impact of government bonds on the supply side and liquidity. With the cooperation of fiscal and monetary cooperation, subsequent interest rate cuts are still expected, which will be beneficial to the bond market overall.” . But from a phased perspective, the bond market volatility may increase due to factors such as marginal improvement in fundamental data, requirements for anti-idling of funds, and pressure on the liability side of institutions.”

Market participants generally believe that the central bank’s inclusion of government bond purchases in its regular toolbox can, to a certain extent, substitute for other base money injection tools. However, the effect of expansion of base money and broad money supply needs to be comprehensively evaluated. In the short term, it may be necessary to consider the constraints of monetary policy to maintain price stability internally and keep the exchange rate within a reasonable fluctuation range externally. In the medium to long term, it will have certain benefits for coordinating fiscal and monetary policies, smoothing monetary policy operations, and long-term development of the government bond market.

Authors of this article: Wang Jing, Dong Daoyong, Zhai Zhuo, Source of this article: Xinhua Finance, original title: “The central bank’s purchase of government bonds is not QE, nor is it monetization of fiscal deficits”

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