Is the "Chinese version of QE" coming? There is a rare consensus among domestic and foreign institutions: the central bank's purchase of treasury bonds is not the same as QE

Finance Associated Press, March 28 (Reporter Yan Jun) The small essay of "the central bank buys treasury bonds" made the stock market rise.

On the morning of March 28, a number of sources, including well-known scholar Liu Yuhui, showed that the central bank would buy treasury bonds. This rumor was interpreted by the market as "China's version of Super QE (Quantitative Easing)".

As soon as the news came out, the market immediately chose to "believe". The Shanghai Composite Index surged higher throughout the day, and although it fell back after 2 p.m., it still returned to 3,000 points. In addition, since March, the net purchase of financing has exceeded 60 billion yuan, a new monthly high since last year, and the volume of Shanghai and Shenzhen transactions has reached 932.2 billion yuan.

Affected by the news, treasury bond futures rose in the short term, and most of them rose as of the close, with the 30-year main contract falling back from more than 0.4% to 0.15%, the 10-year main contract and the 5-year main contract being flat, and the 2-year main contract up 0.01%.

The news of the central bank's next purchase of government bonds is not only fermenting in China, but the Morgan Stanley report also paid attention to this topic in a research report this morning, but Morgan Stanley pointed out in the research report that China's central bank's quantitative easing will not happen. The report, which was widely circulated in the afternoon, was also cited as the reason for the market pullback.

Why does the central bank's purchase of treasury bonds have a great impact on the market? Is it feasible for the central bank to directly buy treasury bonds? Why is the central bank's purchase of treasury bonds interpreted as China's version of "QE"? Is this interpretation appropriate? Around these issues, a number of public offerings and securities firms have given the latest interpretations.

The central bank is not allowed to buy Treasury bonds in the primary market, which is feasible but not commonly used

Where did the news of the central bank's purchase of treasury bonds come from? The Soochow macro team believes that this is a statement made by the top management at the 2023 Central Financial Work Conference, "gradually increasing the purchase and sale of treasury bonds in the open market operation of the central bank" has triggered heated discussions in the market today, as well as speculation: fiscal monetization and the central bank's big release of water are coming?

The central bank's purchase of treasury bonds has two meanings, one is to buy directly in the primary market, and the other is to buy in the secondary market. Chuangjin Hexin Fund said that it is certain that according to the People's Bank of China Law, the central bank is not allowed to buy treasury bonds in the primary market; buying and selling treasury bonds in the secondary market is itself part of the central bank's open market operation. According to the PBOC's overview of open market operations, the People's Bank of China's open market bond transactions mainly include repurchase transactions, cash bond transactions and the issuance of central bank bills.

As for the reason why the central bank is prohibited from buying treasury bonds directly in the issuance market, Wang Yongjian, a strategic analyst at Zhongtai, explained that there are two reasons: first, it is equivalent to the direct leverage of government departments, and there is a risk of overdraft finance; second, it will lead to speculation about flooding, which is not conducive to the expected guidance of the central bank.

Even though central banks can buy Treasuries in the open market, they are not commonly used in practice. Some analysts have pointed out that the volume of open market operations can easily be 100 billion yuan or even 100 trillion yuan, and if the method of direct purchase is used, it is easy to cause price fluctuations.

One of the ways for the central bank to purchase bonds from the secondary market is to pledge repurchase, which will not affect the price, maintain a stable policy interest rate to regulate the market, and third, government and financial bonds and central bank bills can be included in the collateral to facilitate the increase in volume.

Wang Yuchao, the proposed fund manager of Yongying Anyu 120 Days, pointed out that in fact, the central bank had carried out cash trading of treasury bonds around 2000. In 1999, the central bank intensified the purchase of cash bonds of treasury bonds and policy financial bonds issued in the market in the course of open market operations, and the increase in open market business for the whole year was 192 billion yuan, of which 128.8 billion yuan was repurchased and 63.2 billion yuan was purchased in cash bonds.

Therefore, on the whole, it is clear that buying and selling treasury bonds can become a necessary supplement to open market operations, and the central bank will be more cooperative with the issuance of treasury bonds at the liquidity level this year, as well as leaving room for the directional issuance of ultra-long-term treasury bonds. But the deficit monetization floor still exists, and there is no need to read too much into it.

Interpretation of domestic and foreign institutions: the central bank's purchase of treasury bonds is not equivalent to QE

The underlying logic behind the central bank's purchase of Treasury bonds to trigger a rise in the stock market lies in the market's expectation of liquidity.

Wang Yuchao said that the central bank's purchase of treasury bonds in the secondary market will change the supply and demand relationship of treasury bonds in the market, thereby affecting the yield of treasury bonds. This helps to reduce the cost of borrowing across the economy and stimulates investment and consumption. By buying Treasury bonds, the central bank injects base money into the market, increasing liquidity in the banking system. This allows banks and other financial institutions to have more money available for loans and other investment activities, which in turn promotes credit expansion and economic growth.

Whether it is a domestic public offering, a brokerage, or an overseas investment bank, it is believed that the Chinese version of QE will not happen, and the central bank will not inject liquidity by flooding.

Morgan Stanley pointed out in its latest research report that the Chinese version of QE will not happen. In Morgan Stanley's view, it has become standard practice for central banks around the world to shift from the use of central bank bills, reverse repo and lending facilities (LFs) to the greater use of government bond trading to control financial conditions to improve open market operating mechanisms. The central bank will not buy government bonds in the primary market, so this cannot be quantitative easing.

Chuangjin Hexin Fund also gave the same view, and the central bank's trading of treasury bonds in the secondary market should not be equated with fiscal monetization or QE. Article 29 of the People's Bank Law clearly stipulates that the People's Bank of China shall not overdraft government finances and shall not directly subscribe to or underwrite treasury bonds and other government bonds. The central bank's purchase of treasury bonds in the secondary market is conducive to better ironing out the disturbance of liquidity caused by the centralized issuance of treasury bonds, which may boost market sentiment in the short term.

Wang Yuchao also suggested that the market is currently focusing on whether the central bank will combine other monetary policy tools for comprehensive control.

The Soochow macro team pointed out that combined with overseas experience, it may not have reached the point where the central bank directly buys treasury bonds on a large scale. The United States and Japan mainly buy treasury bonds through outright purchases in the secondary market, and we find that the timing of their central banks' bond purchases has some common characteristics: 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 purchases may have "path dependence", and once they are opened, it is difficult to exit.

Unaffected by the rumors, fund managers' judgment on the bond market is still based on economic fundamentals

Relative to the excitement of equity market investors, the bond market has been relatively calm. The views of public fixed income fund managers are also more rational. Chuangjin Hexin Fund said that the judgment of future bond yields still depends on the direction of changes in economic fundamentals. The economic data in January and February this year improved marginally, and there were some positive signals in the real estate market, which may face some adjustment pressure in the second quarter after the bond market rose too much in the short term.

Ping An Fund also pointed out that the bond market in the second quarter may show an overall volatile trend. The constraints on the upward yield are mainly due to the high level of economic operation and the low interest rate environment required for the conversion of bonds, while the downward constraints on the yield are mainly due to the interest rate differential between China and the United States, capital idling and other factors.

Wang Yuchao further analyzed that in the medium and long term, before the recovery of physical financing demand, financing costs are still in a downward channel. At present, the pressure on banks' net interest margins is gradually increasing, and there is still a large demand and room for the cost of bank liabilities to be reduced. In the short term, due to the constraints of overseas liquidity, given the exchange rate pressure, there is little expectation of a rapid and sharp cut in the policy rate, so the curve is likely to remain flat and then fluctuate downward.

In terms of operation strategy, he suggested that the short and medium end should follow the fluctuations of the capital side, and the long end should pay attention to the expected changes and adjustments. Under the general logic of chemical debt, the refinancing of urban investment bonds continues to shrink, and credit bonds are still facing the problem of asset shortage, and the subsequent interest rate spread may remain low, following the fluctuation of risk-free interest rates.

(Financial Associated Press reporter Yan Jun)