The central bank and the Ministry of Finance released a blockbuster signal: the central bank buys treasury bonds!

The size of the central bank's balance sheet may soon be taking off.

On April 23, the Ministry of Finance issued a document in the morning, and the central bank issued a document late at night, expressing the same meaning: the central bank buys and sells treasury bonds in the open market.

On the morning of April 23, the Ministry of Finance issued a document to support the gradual increase in the purchase and sale of treasury bonds in the open market operation of the central bank.

Late at night on April 23, the central bank stated that the central bank would carry out treasury bond trading in the secondary market.

The Financial Times, a subsidiary of the central bank, posted on social media: In response to the trend of long-term government bond yields, the Financial Times reporter recently interviewed the head of the relevant department of the People's Bank of China. The person in charge said:

1. The central bank buys and sells treasury bonds in the secondary market, which can be used as a liquidity management method and a reserve of monetary policy tools.

2. Many experts have suggested that the central bank's open market operations can cooperate with the fiscal sector to finance deficit financing......

3. In the future, the central bank will carry out treasury bond operations in both directions.

4. It should also be noted that the central banks of some developed economies are forced to buy treasury bonds on a large scale in one direction to achieve monetary policy objectives when their conventional monetary policy tools are exhausted, while the mainland insists on implementing a normal monetary policy, and the People's Bank of China's buying and selling of treasury bonds is completely different from the quantitative easing (QE) operations of these central banks.

What do you think about this?

1、

What is not QE?

Let's first look at the key words given by the head of the central bank in an interview: central bank, secondary market, and buying treasury bonds.

According to the definition of European and American countries, as long as the central bank is in the open market and directly participates in the purchase and sale of treasury bonds, it is called quantitative easing.

Because this is equivalent to increasing the base currency, injecting liquidity directly into the market.

However, on the mainland, this is not called quantitative easing, and certainly not the monetization of the fiscal deficit - the official caliber.

According to the available information, the central bank is currently going to include medium and long-term treasury bonds in the scope of direct trading in the secondary market as a monetary policy tool.

After SLF, MLF, SLO, and PSL, a new tool will be born.

What should I pay attention to?

The central bank operates in the open market, acting as a medium or collateral "bonds", which are short-term, overnight, 7 days, one month, and up to 1 year.

If medium- and long-term government bonds are used as a medium for direct trading, the risk of the bonds themselves will change significantly.

Therefore, regardless of the name, this operation is essentially QE.

2、

The central bank will inevitably buy government bonds

The central bank buys treasury bonds in the secondary market, and there is no resistance, and it will definitely be implemented.

First of all, just as the person in charge of the central bank said, the mainland government bond market has ranked third in the world, and its liquidity has increased significantly, which provides the possibility for the central bank to carry out treasury bond cash bond trading operations in the secondary market.

Secondly, there are only psychological barriers, and there are no legal obstacles.

The Law of the People's Bank of China stipulates that the central bank shall not overdraft the treasury and shall not directly subscribe to or underwrite treasury bonds and local government bonds.

This means that the central bank cannot directly participate in the bidding of treasury bonds in the primary market, as other financial institutions do.

However, when other financial institutions want to trade treasury bonds in the secondary market after buying them in the primary market, the central bank can buy and sell them.

Because this is the law of the People's Bank of China, in order to implement monetary policy, it is possible to buy and sell treasury bonds and other financial debts.

According to Article 29 of Chapter IV of the People's Bank of China Law, the People's Bank of China shall not overdraft government finances and may not directly subscribe to or underwrite treasury bonds and other government bonds.

Article 23 of the People's Bank Law states that the People's Bank of China may, in order to implement monetary policy, buy and sell government bonds, other government bonds, financial bonds and foreign exchange in the open market.

Of course, the most important thing is that the top-level design has been planned.

On the morning of April 23, the Ministry of Finance issued a document to support the gradual increase in the purchase and sale of treasury bonds in the open market operation of the central bank.

On the evening of April 23, the central bank stated that the central bank would carry out treasury bond trading in the secondary market.

None of this is accidental.

Both articles mentioned an important message: the Financial Work Conference proposed 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."

If you look at the press releases of previous financial work conferences, you will not find this information.

The press release "misses" this piece of content for various reasons, but it is real.

The specific content appears in the book "Excerpts on Financial Work": A speech delivered at the Financial Work Conference on October 30, 2023, mentioned that it is necessary to enrich the monetary policy toolbox, and the People's Bank of China (the central bank of China) should gradually increase the trading of government bonds in the open market.

That's the most important thing.

The current ecology is open from above, and it will be implemented below.

3、

It was already grayscale tested last year

For the purchase of treasury bonds, in fact, the grayscale test began last year.

What was the biggest change in the last year? Central bank balance sheets have swelled dramatically and reached record highs.

As of the end of 2023, the total assets of the People's Bank of China reached a record high of 45.7 trillion yuan, and the balance sheet expanded by about 4 trillion yuan compared with 2022.

On a slope basis, the size of central bank balance sheets expanded significantly faster last year than the average of the past 10 years.

If you look at the structure carefully, in fact, the main thing is that MLF expands very much.

It used to be about 180 billion, but last year it was 2.5 trillion, an increase of more than 10 times.

How to understand it? It's essentially QE.

What is MLF?

The central bank's loans to commercial banks, why do commercial banks need MLF, because their liquidity goes to subscribe to urban investment bonds and other treasury bonds.

As a result, the Treasury bonds were issued, but the central bank's base money expanded.

Although the central bank does not directly buy government bonds, it only uses commercial banks as a channel.

The walker grandson, the walker grandson, change it, you can't recognize it as Sun Xingzhi?

4、

Central bank balance sheets have skyrocketed

What is the impact of the central bank's purchase of government bonds? The balance sheet has skyrocketed!

Why does the central bank emphasize that this is not QE, or that it is not the monetization of fiscal deficits?

Even a little bit of a tiger color change feeling?

Because anyone in the know knows what that means.

Treasury bond financing has always been the primary problem facing a country.

The finance department wants to build some infrastructure and give some benefits to employees, but the finance has no money, so how can I borrow money?

If you think about the people, the fruits of economic development are enjoyed by the people, and the people trust you, then the people will subscribe to the treasury bonds you issue, and you will be able to raise money from the people.

The rules of this game are actually to restrain finances, abide by financial discipline, think about the common people, and don't mess around.

But let's think about it, the finance needs to issue treasury bonds, and the central bank prints money, so the central bank directly prints money to buy treasury bonds, can't it?

Yes, that's quantitative easing (QE).

What is the central bank's financing of finance? A game of left-handed reversal of right-handedness.

The United States, Japan, Europe, etc., have been practicing for more than ten years.

With the central bank in place, there is no need to worry about the issuance of treasury bonds, and you can issue as many treasury bonds as you want.

10 trillion, 100 trillion, 1000 trillion, don't worry at all.

Standing at the upper level of finance and currency, it is absolutely very convenient for the central bank to buy treasury bonds directly, and there is no need to look at anyone's face anymore, but why are you still twisting and pinching?

It's because it's so convenient, so it's twisted and pinched.

What will be the impact of the central bank printing money directly and providing financing to the treasury "without restraint"?

The theoretical result is that the central bank's balance sheet takes off, the distribution of wealth in society is unbalanced (because fiscal policy leads to a decrease in market efficiency), inflation soars, the national currency collapses, and so on.

Since the implementation of quantitative easing in European and American countries, what changes have taken place in the balance sheets of central banks?

The Federal Reserve soared from $900 billion to $9 trillion, the European Central Bank from 1.3 trillion euros to 8.8 trillion euros, and the Bank of Japan from 110 trillion yen to 760 trillion yen.

In just over a decade, the balance sheet size of the central banks of Europe, the United States and Japan has soared by 7-10 times.

According to the experience of Europe, the United States and Japan, it is too easy for central banks to buy government bonds, but it is too difficult to sell government bonds, so the size of central bank balance sheets has been rapidly inflated.

No one wants to spit out the meat in their mouth.

Think about land finance, it's easy to understand, because once you get addicted, it's so hard to quit.

Therefore, after quantitative easing and quantitative tightening, Europe, the United States and Japan are not willing to let the central bank sell treasury bonds at all, they will only wait for the maturity of treasury bonds and passively "shrink the balance sheet".

Therefore, it can be expected that after the central bank starts to buy treasury bonds, even if it buys and sells, the scale of buying must be much larger than the scale of selling, and the size of the central bank's balance sheet will expand rapidly.

If you look at the need for financing scale in the coming years, this inference is even stronger.

So, the balance sheet expansion has just begun, and you will be able to experience it in five years.

5、

Why is there no inflation in the West and no currency collapse?

The first question is, in the past ten years, the world's three major central banks have issued money so indiscriminately, why have these regions not seen inflation, is the economic theory wrong?

No.

The past decade or so has been the best era of globalization, with China providing the cheapest goods in the world, and China's terrifying production capacity has fully covered the demand for the release of currency.

Therefore, due to China's blessing, inflation in Europe, the United States and Japan has not risen, but the scale of the capital market has skyrocketed.

The Nasdaq soared 10 times, the Nikkei 225 soared 3.5 times, and the German stock market also rose 3 times.

The second question is, why didn't the world's three major central banks issue money so indiscriminately?

This is also easy to understand.

First of all, the meaning of a currency crash is that the currency is issued more, but things have not changed much, so the currency has depreciated.

The U.S. dollar, the euro, and the yen belong to the world's currencies, and although they are issued by these three central banks, they are all used all over the world.

What's more, these three currencies are not limited to these three regions, they have access to countries around the world, such as South Korea, Southeast Asia, South America, Africa, and of course, China.

For Europe, the United States, and Japan, their currency over-issuance in the past was indeed very serious, but if we take into account the broader region, especially China, where the economy is developing rapidly and production is expanding sharply, the pressure of their currency over-issuance has been digested.

Second, the exchange rate is a relative concept.

In the past ten years, the US dollar currency has been overissued, the euro currency has been overissued, the yen currency has also been overissued, etc., everyone has been over-issued and depreciated synchronously, but it is reflected in the exchange rate, and the change is not much.

Moreover, don't look at the data, the central banks of Europe, the United States and Japan have serious over-issuance of currency, in fact, in horizontal comparison, these three central banks are still "temperate", and the over-issuance of currencies in other countries is even more serious.

Therefore, the exchange rates of the United States, Europe and Japan have not changed much in the past ten years.

epilogue

It should be noted that the synchronization of monetary policies of the world's major central banks is very critical for the exchange rate.

For example, in the past year, the yen exchange rate has been about to burst, why? Because the Bank of Japan is contrary to the US Federal Reserve and the European Central Bank, and is no longer as synchronized as before.

It is clear from the balance sheet that both the ECB and the Fed are shrinking their balance sheets, but the BOJ is still expanding their balance sheets.

In this case, if the yen does not depreciate, who will depreciate?

If balance sheet inflation is unavoidable, then it's worth considering:

1. Will there be any other countries that will provide cheap goods for China in the future? If not, what about inflation?

2. Europe and the United States are already shrinking their balance sheets, and Japan is about to tighten, if the world's major central banks enter a tightening cycle, and our balance sheet is rapidly expanding, then what about the RMB exchange rate?