The rumors of "water release" have been disturbed, the stock market has believed it, the bond market has not believed it, and the "central bank will directly purchase bonds" is doubtful

Finance Associated Press, March 28 (edited by Yang Bin) Today, a "small composition" of a big release of water was ferocious, igniting the stock market, and there are rumors that "the central bank will restart the purchase of treasury bonds". The stock market is believing and is on the strong side, but the bond market, which gathers many institutional investors, is not believing it, and the market is flat, and this rumor has aroused doubts from some institutions. On the whole, the industry believes that there is no need at present, and there are many obstacles, far from the point where the central bank has entered the primary market on a large scale to directly purchase treasury bonds, and the mainland's monetary policy has not turned, and the focus is still on opening up the transmission mechanism.

Affected by the above rumors, A-shares rebounded today, and the Shanghai Composite Index rose 0.59% to regain 3,000 points. However, the bond market was flat, with the 10-year Treasury yield rising in the morning and then fluctuating throughout the day, and as of 16:00, the yield on the 10-year Treasury active bond rose 1 bp to 2.3350%. The main contract of 10-year treasury bond futures fluctuated in a narrow range throughout the day and closed flat today.

The central bank can buy and sell Treasury bonds in the secondary market, but outright purchases are rare and disadvantageous

According to Article 23 of the current People's Bank of China Law of the People's Republic of China (amended at the Sixth Session of the Standing Committee of the Tenth National People's Congress on 27 December 2003, hereinafter referred to as the "People's Bank of China Law"), the monetary policy tools that the People's Bank of China may use to implement monetary policy include buying and selling government bonds, other government bonds, financial bonds and foreign exchange on the open market.

Article 25 stipulates that the central bank may, on behalf of the financial department of the State Council, organize the issuance and redemption of treasury bonds and other government bonds to various financial institutions. However, Article 29 also stipulates that the central bank shall not overdraft the government's finances and shall not directly subscribe to or underwrite treasury bonds and other government bonds.

(Source: People's Bank of China Law, compiled by Cailian)

A senior fixed income analyst of a securities firm explained to Cailian that according to the People's Bank of China Law, the central bank cannot directly purchase treasury bonds from the primary market, but can purchase treasury bonds through the secondary market, which is usually reflected in the "claims to the government" account in the central bank's balance sheet.

The last time the central bank bought Treasuries was back in 2007. In 2007, the Ministry of Finance issued special treasury bonds in an open and targeted manner, divided into eight tranches, raising a total of 1.55 trillion yuan. Among them, 1.35 trillion yuan will be used to purchase equivalent foreign exchange from the central bank and establish a China Investment Corporation to ease the hedging pressure of the central bank and improve foreign exchange operating income. In 2017 and 2022, the PBOC purchased the renewal of the 2007 special treasury bonds after they matured.

According to the analysis of the previous research report of the macro team of GF Securities, the People's Bank of China can use open market operations to purchase treasury bonds in the secondary market, but it is not common to directly buy out or sell out treasury bonds, and treasury bonds are more used as collateral to participate in open market operations. Collateral is not included in the central bank's balance sheet, so in terms of data performance, the "claims against the government", which reflects the purchase and sale of treasury bonds in the balance sheet of the central bank, has hardly fluctuated. The existing scale of 1.5 trillion yuan is mainly special government bonds purchased in the past.

Tao Chuan, chief macroeconomist of Soochow Securities, pointed out that the purchase or sale of treasury bonds through cash trading in the secondary market may be a "killer weapon" when necessary. If the treasury bonds purchased have a longer maturity, the central bank is equivalent to releasing long-term liquidity to the economy in equal amounts, and the effect of stabilizing the economy may be more obvious. However, the downside is that it will directly interfere with the pricing of the bond market, and the central bank will bear the risk of subsequent bond fluctuations.

The above-mentioned case of the central bank's purchase of special treasury bonds is the outright purchase of treasury bonds.

The necessity of central bank purchases of government bonds has been controversial

Although the above-mentioned information that "the central bank has resumed the purchase of government bonds" remains at the level of rumors, the market has different views on whether it is necessary for the central bank to enter the market to buy government bonds.

A senior macro analyst at a brokerage firm in Shanghai told the Financial Associated Press that aside from the problems of the legal system, it is not necessary for the central bank to directly buy treasury bonds. The central bank buys treasury bonds in order to inject liquidity into the real economy, but at present, there is abundant interbank liquidity, and the gambling point of the economy lies in how to transmit liquidity to the real economy and effectively reduce the financing cost of the real economy, rather than the lack of loose liquidity.

Another assistant director of a securities research institute in Beijing believes that without the help of the central bank, the current pressure on banks to directly inject liquidity into entities at low cost is greater. In order to break through the current liquidity gambling point, the central bank may consider using some unconventional means, such as outright purchases of government bonds. The central bank's direct purchase of government bonds in the secondary market can pave the way for further unconventional monetary policy measures, such as amending the People's Bank of China Law to allow the central bank to purchase government bonds in the primary market.

However, Zhou Shilei, director of the global markets department of UOB, said that if the central bank wants to buy government bonds directly in the open market, the legislation should be mentioned at the two sessions, and there is no progress in the legislative work of the PBOC. In addition, if the central bank is to be pushed to buy government bonds directly, the tone of monetary policy will be shifted in advance. The current prudent monetary policy has not been set to a positive tone on any occasion.

Based on overseas experience, Tao Chuan believes that the current situation may not yet reach the point where the central bank directly buys government bonds on a large scale. The United States and Japan have some common characteristics at the time of buying treasury bonds through the secondary market: first, the macroeconomic pressure is under pressure; second, the central bank has no room to cut interest rates; and third, the central bank's bond purchase may be "path dependent", and it will be difficult to exit once it is opened.

At present, the monetary policy has not turned, and the foothold is still to open up the transmission mechanism

An investment manager of a joint-stock bank believes that the essence of today's news of "the central bank's resumption of the purchase of treasury bonds" is to take the old news out of context, which in turn leads to conjectures such as "the central bank's big release of water" and "fiscal monetization".

In fact, the central bank's recent attention to "capital idling" has risen, and the fixed income department of CITIC Securities believes that this may mean that the growth of total broad liquidity will slow down, while the volume and price of narrow liquidity are expected to remain stable.

Liquidity appears to be normal and not tight for now. According to the data, since March, the central bank has continuously launched 3 billion and 2 billion "land" reverse repurchase operations in a single day, and has returned 1,166 billion yuan of net funds through the open market in the past three weeks.

Tao Chuan believes that fiscal monetization is not taboo, but the central bank must be cautious in releasing water. This year, the central bank will be more in line with the issuance of treasury bonds at the liquidity level, and leave room for the directional issuance of ultra-long-term treasury bonds. "Increasing the purchase and sale of treasury bonds" cannot avoid the premise of "controlling the currency", and the current monetary policy pays more attention to structural optimization and the improvement of the toolbox.

In the research report, the strategy team of Guohai Securities believes that the mainland's monetary policy at this stage is full of determination, focusing on dredging the monetary policy transmission mechanism, and guiding the decline in deposit interest rates to the loan side as the main foothold of the policy. The central bank has released a stable expectation signal through a stable open market operation, and the focus is still on opening up the monetary policy transmission mechanism, forming the current situation of not being able to ease credit and not ending to easy money.

(Finance Associated Press Yang Bin)