The central bank has made a big statement! The buying and selling of treasury bonds in the secondary market can be included in the policy toolbox

Recently, the remarks that "it is necessary to enrich the monetary policy toolbox and gradually increase the purchase and sale of treasury bonds in the open market operation of the central bank" have aroused the market's attention to the central bank's purchase of treasury bonds. Since then, authoritative market experts have issued claims that "the future of treasury bonds bought and sold in the open market may be included in the policy toolbox", which has further aroused heated discussions in the market.

On April 23, the head of the relevant department of the People's Bank of China said in an interview with the Financial Times that the central bank can carry out treasury bond trading in the secondary market, which can be used as a liquidity management method and a reserve of monetary policy tools.

The Central Financial Work Conference proposed that "it is necessary to enrich the monetary policy toolbox and gradually increase the trading of treasury bonds in the open market operations of the central bank." The mainland has already ranked third in the world in terms of the size of the mainland's treasury bond market, and its liquidity has increased significantly, which has made it possible for the central bank to carry out the trading of treasury bonds in the secondary market. Many experts have pointed out that the central bank's open market operation can cooperate with the fiscal department to carry out deficit financing, but the scale of treasury bond issuance must be relatively large enough, and the pace of issuance must be relatively stable, so as to effectively achieve policy transmission and avoid large fluctuations in market interest rates; moreover, the central bank's treasury bond operation in the future will also be two-way.

A number of institutional chief economists believe that it is legally feasible to implement monetary policy by buying and selling treasury bonds in the secondary market. In the future, the central bank is likely to increase the purchase and sale of treasury bonds, but this process is expected to be gradual and prudent, and the coordination of fiscal and monetary policies needs to be further strengthened.

The buying and selling of treasury bonds in the secondary market can be included in the policy toolbox

Historically, China's central bank tried to buy and sell government bonds in 1997, but it was quickly suspended due to the lack of depth and breadth of the market. Over the years since, the mainland treasury bond market has developed sustainably and by leaps and bounds, providing conditions for the central bank to carry out treasury bond trading operations.

The above-mentioned authoritative market experts said that it is expected that the second quarter may usher in an intensive period of government bond issuance, especially the issuance of special treasury bonds. The PBOC will flexibly grasp the operation of policy tools such as reverse repo in the open market, accurately hedge the short-term impact of fiscal bond issuance factors, and maintain the stable operation of market interest rates.

Huaxi Securities macro research report pointed out that one of the core reasons why the central bank did not participate in large-scale treasury bond trading in the secondary market was that the mainland treasury bond market was not active enough. If the central bank enters the market directly, large purchases and sales can lead to increased volatility in the price of Treasury bonds. However, since the beginning of this year, the activity of government bonds has risen rapidly, especially at the long end and ultra-long end. Treasury bonds are becoming more and more active in the secondary trading market, which makes it more feasible for the central bank to increase the trading of treasury bonds.

In the long run, the room for RRR cuts is gradually decreasing, which also increases the possibility of the central bank increasing the purchase and sale of treasury bonds.

The above-mentioned report of Huaxi Securities believes that there is still room for RRR cuts, but the space is gradually decreasing. In this context, the central bank's buying and selling of government bonds through the secondary market can be used as a tool to regulate the base currency. Replenishing the monetary policy toolbox or the primary purpose of the central bank's bond purchases.

The jurisprudence is feasible

At present, there are three ways for the central bank to operate monetary policy related to treasury bonds: one is the trading of cash bonds, the second is the transaction of pledged treasury bonds, and the third is the purchase of special treasury bonds, which mainly uses repurchase trading tools at present.

Wen Bin, chief economist of China Minsheng Bank, said that pledged bond purchases (repurchase transactions) in the secondary market are a common operation method used by the central bank. In this type of transaction, government bonds are used as collateral, no different from credit bonds, loans, and other types of assets, and the central bank buys them to provide short-term funds to the market to achieve the goals of monetary policy. This kind of operation is also not included in the central bank's claims against the government, and its essence is still the creditor-debt relationship between the central bank and the financial system, especially the banks.

In recent years, the central bank has widely used treasury bonds and local bonds as collateral in monetary policy operations, and cooperated with the Ministry of Finance to carry out treasury bond market-making support operations.

"Treasury bonds have always been an important tool of the People's Bank of China's monetary policy operations, but they are treated as collateral and not incorporated into the central bank's balance sheet. Guan Tao, global chief economist of Bank of China International Securities, pointed out in an article.

There are two types of cash bond trading: cash bond buyout, the former is a one-time purchase of bonds from the secondary market, and the latter is a reverse operation.

According to Guan Tao's analysis, the reason why the People's Bank of China did not choose cash securities trading as the main means of open market operations is related to the fact that foreign exchange accounts have been the main channel for the central bank to expand its balance sheet and release base money for a long period of time since the exchange rate was merged in 1994. From the end of 2008 to the end of 2015, the central bank's foreign exchange accounted for an average of 79.2% of the central bank's total assets, with the highest proportion at the end of 2013 accounting for 83.3%. Since 2014, with the changes in the domestic foreign exchange situation and even the phased reversal, the foreign exchange account is no longer the main channel for the central bank's monetary investment, and the People's Bank of China has enriched liquidity adjustment through a series of monetary policy tool innovations.

It is legally feasible to implement monetary policy by buying and selling government bonds in the secondary market. Article 23 of the People's Bank of China Law states that the People's Bank of China may, in order to implement monetary policy, buy and sell treasury bonds, other government bonds, financial bonds and foreign exchange on the open market.

Strengthen fiscal and monetary policy coordination

The reason why the phrase "further enriching the monetary policy toolbox" has aroused widespread discussion is that China's economy is now at a critical juncture.

In Wen Bin's view, in the context of the resolution of local debt risks, the combination of fiscal and monetary policies, as well as the improvement of residents' consumption tendency and the increase of corporate investment confidence, the market has further expectations for policy support, including from the perspective of resolving the pressure of local debt, it seems that there are also demands for a "new monetary policy mechanism".

Wen Bin said that the central bank may buy and sell treasury bonds for two purposes: one is to adjust the money supply to meet the growth of money demand in the economic development or to absorb surplus liquidity, and the other is to reduce long-term interest rates and compress term premiums to encourage medium and long-term credit or boost asset prices. In the first scenario, more short- and medium-term government bonds are purchased, and in the second scenario, more long-term government bonds are purchased.

"Even if the People's Bank of China expands the scale of cash bond trading in open market operations and uses treasury bond trading as an important liquidity adjustment tool, it is necessary to further strengthen the coordination of fiscal and monetary policies. Guan Tao thinks.

As of the end of last year, the outstanding US treasury bonds were equivalent to 4.27 times the total assets of the Federal Reserve, while China's proportion was only 64.7 percent, but this also involves the question of whether and whether China will be able to implement the same radical fiscal policies as the United States and the West; second, to increase the liquidity of treasury bond transactions, most domestic investors have adopted the strategy of holding to maturity, and the market is not active in treasury bond trading, and there is a "shortage of assets" Third, the financial departments should not only meet the needs of deficit financing in issuing bonds, but also cooperate with the central bank's monetary policy operations and increase the issuance of short-term treasury bonds. At present, none of the above conditions are met. Moreover, unlike the United States and the West, where the statutory reserve requirement ratio has mostly been reduced to zero or even eliminated, the reserve requirement ratio of China's banking system is still 7%, and there is still room for total expansion.

Ming Ming, chief economist of CITIC Securities, believes that from the perspective of enriching the monetary policy toolbox, the central bank may increase the purchase and sale of treasury bonds in the future, but this process is expected to be gradual and cautious. Referring to overseas experience, the central bank's purchase of treasury bonds has alleviated the crowding out effect caused by the large issuance of treasury bonds, and on the other hand, it has also released liquidity in the form of fiscal expenditure, improved the capital environment, and then guided interest rates downward. However, judging from the current economic environment and policy space, the urgency of the central bank's bond purchase is not strong.

According to a clear analysis, liquidity is still relatively abundant at present, and the funding interest rate basically revolves steadily around the policy interest rate; the monetary policy toolbox is rich in contents, and there is still a lot of room for operation in quantitative tools such as RRR cuts and price-based tools such as interest rate cuts; and the principle of the mainland's monetary policy operation is not to engage in flood irrigation and over-issuance of money, and to pay more attention to the health of the balance sheet and inflation expectations. Even if the central bank participates in the trading of treasury bonds, the independent central bank's financial budget management system will continue to be implemented, and a "firewall" will be built between the two "money bags" of the treasury and the central bank.

The above-mentioned person in charge of the relevant department of the People's Bank of China said on the 23rd that the central banks of some developed economies were forced to buy large-scale one-way government bonds to achieve monetary policy goals when conventional monetary policy tools were exhausted, while the mainland insisted on implementing normal monetary policy, and the People's Bank of China's buying and selling of government bonds was completely different from the quantitative easing (QE) operation of these central banks.

The above-mentioned authoritative market experts have also stressed that in the future, the central bank may include the purchase and sale of treasury bonds in the reserve of policy tools to enrich the liquidity management toolbox, but the monetary and financial conditions will remain reasonable and moderate on the whole, which is fundamentally different from the normal monetary policy of Europe and the United States and the United States are forced to buy a large number of treasury bonds.

(This article is from Yicai)

Relevant person in charge of the central bank: Carrying out treasury bond operations is a two-way way Buying and selling treasury bonds is completely different from QE operations