For the first time in nearly two decades, the People’s Bank of China has conducted a treasury bond trade – with a net purchase totalling 100 billion yuan (US$14.1 billion) in late August.
The rare use of such a monetary tool has ushered in persistent debate among market institutions on the policy implications of such an expansion of the central bank’s balance sheet. Here are some key questions that have been raised:
Is China using Western-style quantitative easing (QE)?
Beijing has been clear about distancing itself from Western-style QE, which has been criticised for pushing up global inflation and resulting in international spillover.
When President Xi Jinping first mentioned the bond trade during the central financial work conference in October, it was intended to enrich the PBOC’s monetary toolbox.
Speaking at the Lujiazui Forum in June, central bank governor Pan Gongsheng explicitly said that the bond trade did not equate to QE but should be viewed as an ordinary “liquidity-management tool” similar to existing ones like open-market operations.
China’s monetary authority is always cautious in bond trade. Its trade size is far below that of the US Federal Reserve, whose balance sheet expanded significantly following its “unlimited” expansion of US Treasury and mortgage-backed securities purchases.
In a surprising move, the People’s Bank of China recently conducted a treasury bond trade worth 100 billion yuan. This rare event has sparked debates among market institutions about the implications of the central bank’s balance sheet expansion. Despite comparisons to Western-style quantitative easing (QE), Chinese officials have emphasized that this move is not equivalent to QE but rather a liquidity management tool.
At the Lujiazui Forum, central bank governor Pan Gongsheng clarified that the bond trade is intended to enrich the PBOC’s monetary toolbox. Unlike the US Federal Reserve, China’s monetary authority approaches bond trading with caution and smaller trade sizes.
This significant development reflects China’s cautious approach to monetary policy and its commitment to maintaining financial stability. It will be interesting to see how this move impacts the country’s economy in the coming months.
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