China's Central Bank Contemplates Unconventional Monetary Policy Amid Economic Push
In a significant policy shift that could redefine the landscape of China's financial strategy, the People's Bank of China (PBOC) is poised to employ a monetary policy tool that has remained dormant for over two decades. This move, directly inspired by President Xi Jinping's recent directives, underscores China's aggressive pursuit of becoming a global financial superpower. The world's second-largest economy finds itself at a crucial juncture, aiming to fuel growth and navigate through the complexities of global finance.
A revealing new book lays bare some of Xi's profound insights on finance, tracing back to late 2012. During China's pivotal central financial work conference on October 30, Xi emphasized the need to “enrich the monetary policy toolbox,” advocating for the PBOC to increase the trading of treasury bonds in open market operations. This prescription is a departure from the norm in China's monetary policy management, marking a rare instance where the central bank is instructed to buy more treasury bonds.
Historically, the last occurrence of such a strategy dates back to the start of the 21st century, after which the PBOC diversified its liquidity injection measures, favoring relending tools and adjustments in the reserve requirement ratio over bond purchases. Despite Xi's instructions, public records reveal a delay in the PBOC's action to start buying treasury bonds in open market operations within the past five months.
The rationale behind revisiting bond purchases stems from an ever-narrowing space for traditional policy support in China's monetary landscape. Analysts interpret this strategy as Beijing's intensified inclination toward utilizing diverse monetary tools. This method, however, sparks debate over concerns related to fiscal monetisation and the principles of modern monetary theory (MMT), a concept that played a crucial role in guiding the United States's quantitative-easing measures during the pandemic crisis.
Xi envisions a “strong central bank” as a cornerstone of China's aspirations to ascend as a financial powerhouse. His strategic directives include stabilizing the money supply, promoting liquidity, and prioritizing credit allocation towards sectors like tech innovation, advanced manufacturing, green development, and small businesses.
Amidst these ambitious financial reforms, Beijing has set a 5 percent economic growth target for the year. Achieving this milestone, as acknowledged by high-ranking officials and analysts alike, demands meticulous effort and policy stimulus to counterbalance the challenges posed by substantial local-level government debt.
Echoing the need for pragmatic monetary strategies, Ding Shuang, chief Greater China economist at Standard Chartered Bank, commends the anticipated secondary market purchases of government bonds by the PBOC as a viable method to enhance liquidity and stimulate economic activity. He underscores the critical distinction between this approach and the widely recognized Western-style quantitative easing.
Furthermore, in alignment with its strategic financial agendas, the government initiated the sale of a whopping 1 trillion yuan worth of additional government bonds in 2020 and 2023, coupled with plans to issue ultra-long special treasury bonds in the forthcoming years. These measures reflect a cautious yet deliberate attempt to balance stimulus initiatives and maintain an accommodative liquidity policy.
As China embarks on a renewed focus that blends fiscal and monetary policies, PBOC governor Pan Gongsheng and deputy central bank governor Xuan Changneng reassured the effectiveness of China’s liquidity management tools in safeguarding this year's economic growth target. Against the backdrop of a global economic recovery and shifting financial paradigms, China's strategic maneuvers in the monetary policy domain underscore its unwavering commitment to achieving sustainable growth and international financial prominence.
Analyst comment
Positive news: China’s Central Bank contemplates unconventional monetary policy to fuel growth and become a global financial superpower. The move to buy treasury bonds in open market operations signals a shift in strategy and the use of diverse monetary tools. Analysts see this as a viable method to enhance liquidity and stimulate economic activity. The government’s sale of additional bonds and plans for ultra-long special treasury bonds reflect a careful balance of stimulus initiatives. Overall, China is committed to achieving sustainable growth and international financial prominence. Market response: Increased investor confidence and potential positive impact on economic growth.
