A scarcity of low-risk assets in China’s financial sector is obstructing the central bank’s plans to make its monetary policy toolkit more efficient with a return to the treasury bond market after a 17-year hiatus.
Taking its cue from an October 2023 speech by president Xi Jinping, the People’s Bank of China (PBoC) pledged recently to add treasury bond buying and selling to its toolkit, to improve an increasingly flawed monetary policy transmission mechanism.
PBoC trading – different from the quantitative easing moves seen in the West – would help deepen the bond market by improving liquidity and reducing volatility, drawing in more issuers and investors to help firms and other entities reduce their reliance on less efficient bank lending for raising funds.
But there’s a problem: China’s central government has tasked riskier local government issuers with funding investment projects for decades, making their debts unsustainable, while keeping its own balance sheet light.
Its bond issuance is only just picking up. As a result, there are no liquid-enough – and therefore reliable – benchmarks to build a lively bond market around.
This means the central bank’s planned upgrade of the arsenal it fights with to reflate the world’s second-largest economy is a more medium-term ambition rather than a quick fix, and will proceed slowly.
“Using treasury bond trading as the main market operation tool would greatly improve the PBoC’s monetary policy framework, especially the interest rate transmission,” said a policy adviser, asking for anonymity to discuss a sensitive topic.
“But conditions are not ripe. We have an asset famine.”
The PBoC did not immediately respond to a request for comment.
In a May 8 statement to Reuters, it said bond trading “can be used as a liquidity management method and a reserve of monetary policy tools.” It added trading would be “two-way.” — Reuters
Kevin Yao and Samuel Shen write for Reuters. The views expressed here are the writers’ own.
