By Ryan Woo
BEIJING (Reuters) – A line from a speech by Chinese President Xi Jinping a few months ago has sparked speculation that the central bank could start aggressively buying government bonds to support the economy, a stimulus measure that China has long avoided it.
But most analysts believe the People’s Bank of China (PBOC) will stick to traditional tools instead of resorting to massive liquidity injections through “quantitative easing” (QE), as some large economies such as Japan and the United States have done. United.
Market expectations remain high for more stimulus to revive the world’s second-largest economy, which is showing tentative signs of momentum despite a long-running debt crisis in the real estate sector, which accounted for a quarter of China’s gross domestic product.
“The People’s Bank of China must slowly increase trading of treasury bills in its open market operations,” Xi said at a major financial meeting in October in a speech that was not published at the time but was included in a book this month.
Hong Kong’s South China Morning Post cited a book excerpt from Thursday’s speech, sparking a debate in markets over how to interpret Xi’s words in light of the PBOC’s reluctance to flood the system with liquidity due to fears of inflation and assets. bubbles.
China’s blue-chip stock index rebounded 0.5% from one-month lows on Thursday. On Friday, 10-year Treasury bond futures rose the most in three weeks.
The speculation also reflects investor sensitivity to comments made by Xi, China’s president for 11 years and its most powerful ruler since Mao Zedong.
The PBOC did not immediately respond to a request for comment.
AMPLE LIQUIDITY, ROOM TO CUT RATES
Xi’s speech was “not about buying government bonds in the primary market, so not an indication of QE,” said Robin Xing, chief China economist at Morgan Stanley.
“Indeed, in the same speech, Beijing made aggressive comments that the deleveraging process requires a tighter grip on money and credit supply, which in our view indicates a continued preference for austerity to prevent misallocations,” Xing said in a note to investors.
The PBOC is not authorized to purchase bonds directly from the central government. The last time he bought them on the secondary market was 2007.
Xi is “calling for replenishing the central bank’s monetary policy tools,” including expanding its options in open market trading of government bonds to manage liquidity, said Tao Wang, Asia economics chief and chief economist Chinese at UBS Investment Bank.
Guolian Securities economist Rocky Fan said the PBOC could buy treasuries by reducing reverse repurchases, replacing one with the other.
Among other traditional policy tools, PBOC deputy governor Xuan Changneng said last week that cutting commercial banks’ reserve requirement ratios, which now average around 7% after a 50 basis point cut in January, would an important way to inject liquidity.
Last month, the PBOC cut the five-year prime lending rate by 25 basis points to 3.95%, the highest level since the benchmark rate was introduced in 2019.
The PBOC last cut the one-year medium-term lending rate, a guide to the prime lending rate, by 15 basis points to 2.50% in August.
“(Other) central banks are doing QE because their policy rates are near zero and they cannot cut further, but the PBOC still has room to cut its policy rate, which is now at 2.5%,” they wrote Macquarie economists in an article Note.
China is aiming for 3.9 trillion yuan ($540 billion) in special local government bond issues to support the economy this year, up from 3.8 trillion yuan last year, and 1 trillion yuan in special ultra-long-term Treasury bonds to help key sectors.
Reflecting high demand for bonds and ample liquidity in the financial system, China’s 30-year Treasury bonds yield about 2.47%, close to this month’s record low of 2.442%.
“Whether you look at the money supply or the level of interest rates, the degree of monetary easing we have experienced has rarely been seen in history,” said Xia Chun, chief economist at Forthright Holdings.
($1 = 7.2239 renminbi)