China’s central bank treasury-bond trade restart ‘now certain’ as discussions deepen between monetary, fiscal agencies

It is the first in a series of articles that the newspaper plans to run to discuss the room, mechanism and specific ways of cooperation between the PBOC and the Ministry of Finance.

On the fiscal side, it is necessary to further optimise the maturity structure and issuance pace of government bonds

Securities Times

“It places higher demands on the depth and price formation mechanism of the government bond market,” the Securities Times added.

“On the fiscal side, it is necessary to further optimise the maturity structure and issuance pace of government bonds, and consider coordinating the issuance of ultra-long-term special government bonds with central bank operations.”

At the twice-a-decade financial work conference, held in October, President Xi Jinping had requested for the PBOC to gradually increase the buying and selling of central government bonds in the secondary market – a tactic that has gone unused for more than two decades.

The instruction, which was only made public at the end of March with the release of a new book, fuelled feverish speculation over an aggressive easing of monetary policy.

Beijing, though, has denied a Western-style quantitative easing, saying its bond purchases are a way for Beijing to refine its monetary policy tools.

The purchases will also not lead to monetisation of the fiscal deficit, as China’s central bank is still forbidden from buying bonds directly from the finance ministry.

The PBOC has told the market that it still has room for using conventional tools, such as cutting the reserve requirement ratio – the amount of cash that banks must hold as reserves – which stands at around 7 per cent.

The world’s second-largest economy is already well on the course to achieve this year’s economic growth target of around 5 per cent after securing a better-than-expected expansion of 5.3 per cent in the first quarter.

But domestic analysts have been expecting a start of a new money supply mechanism, rather than a wide use of the tool in the short term.

The central bank’s daily monetary operations are being closely watched, as the finance ministry said in late April that it would soon start to sell the 1 trillion yuan (US$138 billion) of ultra-long special treasury bonds mentioned by Premier Li Qiang at the “two sessions” annual parliamentary meeting in March.

About 722 billion yuan of new special bonds have been issued this year, according to Chinese financial data provider Wind.

The PBOC had earlier raised concerns that the yield of its long-term bonds had dropped too much, as the returns on its 10-year government bonds had dropped from 2.74 per cent a year earlier to 2.28 per cent last month.

Coordinated issuance of government bonds would be beneficial to avoid a liquidity shock in the second and third quarters, the Securities Times said.

Previously, the central bank would inject more liquidity into the interbank market through a variety of tools, enabling market players to buy government bonds.

The government should increase the sales of ultra-short, short-term and ultra-long-term special treasury bonds as the current structure would constrain central bank operations, the newspaper added on Wednesday.

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