Early in the morning of April 23, the Ministry of Finance issued:
Support the gradual increase in the buying and selling of treasury bonds in the open market operations of the central bank.
Also late at night on April 23, the head of the relevant department of the People's Bank of China also publicly stated in the media: the central bank carries out treasury bond trading in the secondary market, which can be used as a liquidity management method and a monetary policy tool reserve.
Regarding the matter of printing money and buying and selling treasury bonds, the two major departments spoke out one after another within a day, and these statements and expressions are also particularly intriguing.
For example, in the speech of the Ministry of Finance, the key can be seen in two words:
"Support" and "Incremental".
These two words are very informative and very important, and I need to explain them separately.
Article 29 of Chapter IV of the People's Bank of China Law, enacted in 1995 and amended in 2004, clearly stipulates that the People's Bank of China "shall not directly subscribe for or underwrite treasury bonds and other government bonds".
Mind you, this is a serious legal matter.
Why does the law specifically stipulate that the People's Bank of China cannot directly subscribe for and underwrite government bonds?
Because, for the central bank of any contemporary country, money is credit money, without any real collateral, the purchase of assets in the open market, in essence, is the meaning of additional money printing, if you can directly subscribe and underwrite government bonds, it means that the government can issue bonds indefinitely, and then, change hands to the central bank to exchange for money.
This also means that the government can not care about the balance of payments, anyway, it can borrow without any collateral, unlimited borrowing, and then the central bank can print unlimited money to the government, and the government does not have to care about the real wealth creation in the society, and it can find the central bank to issue as much treasury bonds as it wants, and there will always be money to spend......
Obviously, this is the "happiest government" in the world, and it doesn't have to take any responsibility for printing money, and it doesn't have to worry about inflation, just spend it hard......
Excuse me, is there such a government in the history of the world?
Yes, not only in history, but also now!
Not only there is, but there are many, many, many such governments!
For example, the current governments of Turkey, Argentina, Zimbabwe, Venezuela, North Korea, and most third world countries are all doing this kind of thing, and every country you hear about the collapse of the exchange rate in today's international news is because you have done too many of these things!
If you want to spend as much as you want, you can print as much as you want, and if the government is happy, then prices will just soar, and then the people will suffer?
So, you say, does the People's Bank of China Law need to specifically add this legal provision?
What is a responsible state?
The first is that if the government can control itself in printing money, it can be called a responsible country!
Think about it, the People's Bank of China Law was enacted in 1995, why is this law needed?
Let's look at the data.
What happened in 1994?
It is because the central government's expenditure was not constrained in the past few years, and we tried to print money at that time, which led to the official CPI data in 1994 rising by 24.1% year-on-year.
Currency is like clear water, policy is like noodles, too much water and not enough flour, then it will become a thin soup.
Of course, since China's accession to the World Trade Organization in 2001, China's industrial production capacity has increased unprecedentedly, and it has become the world's largest industrial country, the world's largest manufacturing country, with our ability to produce goods, especially those goods that the world needs, has been greatly improved, which means that flour is becoming more and more.
It doesn't matter if there is more flour and several times more water, so in the past 20 years since entering the 21st century, the Chinese people basically do not know what the experience of soaring prices of daily necessities is.
In retrospect, Article 29 of the People's Bank of China Law means that the People's Bank of China must not directly subscribe to and underwrite government bonds.
If I can't subscribe directly, can I change it to the market and subscribe indirectly?
If I can't underwrite, can I go to the market and buy some of it?
You're really smart, the Chinese are very good, and too good, in fact, our central bank has been doing this since 1998.
Direct subscription and underwriting of bonds, to put it bluntly, is to buy and sell bonds in the primary market of bonds, while the central mother's trading of treasury bonds with other financial institutions in the open market operation belongs to the secondary market, which does not violate the law.
The following two charts, one is the change in the asset size and composition of the People's Bank of China from 1995 to 2023, and the other is the change in the asset composition ratio of the People's Bank of China from 1995 to 2023.
Note: The data source is the People's Bank of China, since 1995, the name of the balance sheet of the People's Bank of China has changed several times, in order to maintain uniformity, I try to classify the previous content according to the current statistical items, the same as the figure below.
In these two charts, the claims against the central government are, to put it bluntly, treasury bonds, while the claims against other depository companies are mainly the assets pledged to the central bank by commercial banks and policy banks (why is it called "other depository companies" so awkwardly and unclear and not directly called commercial banks, because it includes the three major policy banks), and the claims against other financial companies refer to the loans issued by the central bank to the non-bank financial industry.
Looking at these two charts, we find that the entry of "claims against the central government", that is, the issue of the renminbi using treasury bonds as anchors, has always been there, and it is not unique to today.
Therefore, many financial self-media are shouting, what will start on April 23, 2024, the RMB will change its anchor, this statement is really too loose, we have been anchoring with treasury bonds for a long time.
Note a few nodes in the graph.
In 2001, when China joined the WTO, the central bank began to buy foreign exchange on a large scale to print money, and the proportion of foreign exchange in the total assets of the central bank increased, and this process continued until 2013......
In 2007, the scale of claims to the central government skyrocketed, from less than 300 billion yuan at the end of 2006 to 1.6 trillion yuan at the end of 2007 Need to cost, at that time 3 trillion yuan of bad debts of banks (note, the total assets of the People's Bank of China at the end of 1995 were 2 trillion yuan, and at the end of 2007 it became 17 trillion yuan), of which about half, and finally the state to bear, and the way the state undertook it, is to issue special treasury bonds, and then, let commercial banks subscribe, and then re-pledge to the central bank, this is the origin of this part of the treasury bonds - This part of the national debt has not been repaid, and now at the end of March 2024, 1.5 trillion yuan is still hanging there!
Since 2013-2014, China's trade surplus has shrunk sharply, and if the rules of foreign exchange mortgage printing are strictly followed, it means that China's base money supply will continue to shrink on a large scale - but credit money has always been able to continue to expand and not easily contract, otherwise it will trigger a contraction disaster for the whole society.
In order to expand the base money, People's Bank of China began to operate large-scale bond trading in the open market in 2013, and everyone knows that in 2014, the People's Bank of China suddenly began to speak English, from SLF (Permanent Lending Facility) and SLO (Short-term Liquidity Adjustment Facility) in 2013, to MLF (Medium-term Lending Facility) and PSL (Supplementary Mortgage Loan) in 2015, and then to TMLF (Targeted Medium-term Lending Facility) in 2019......
From the end of 2014 to the first half of 2015, China's local governments encountered a debt crisis, and later, the issuance of local government bonds was officially allowed.
It is also in the central bank's expanding open market operations that the share of foreign exchange has gradually declined, while "claims on other depository companies" have soared, now reaching 18.6 trillion yuan, accounting for as much as 40% of the People's Bank of China's 45.7 trillion yuan in assets – compared with less than 50% of foreign exchange assets.
Most of the so-called "creditor's rights" in this part should now be local government bonds, and there is no reason why treasury bonds with better credit should not be included in them.
The Ministry of Finance said that the meaning of the word "gradual increase" is actually to tell everyone that in the previous open market operations of the central bank, it has always been buying and selling treasury bonds, but it has not emphasized and highlighted treasury bonds, nor has it regarded treasury bonds as the most important bond varieties, and the proportion of treasury bonds should gradually increase in the future, and gradually become the most core, the most main, and the largest number of bond varieties in the central bank's open market operations.
As for the word "support", it is even more interesting.
You know, the whole country's money bag matter, basically is the work of the rich dad and the central mother, among them, if you want to talk about administrative power, the rich dad may be stronger, a family dad openly said, I support your mother to do such a thing, in fact, it is on behalf of the central government's official statement, printing money to buy treasury bonds, and in the future, the treasury bonds will be used as the main variety of open market operations, the central government is allowed, central mother, you can rest assured, do this now, if there is a problem (inflation) in the future, the responsibility is not borne by you alone.
So, after the Ministry of Finance publicly stated on behalf of the central government, saying that this could be done and should be done, Yang Ma naturally got Shang Fang's sword, so she also echoed the statement in the middle of the night:
The central bank buys and sells treasury bonds in the secondary market, which can be used as a liquidity management method and a monetary policy tool reserve.
The meaning of this sentence is that with the permission of the central government, we will implement the trading of treasury bonds as an explicit rule, although it has been implemented before, but there is no special statement, since the financial father has already said, then we will implement this as a clear monetary policy, and it is emphasized that it is a "liquidity management method" and "monetary policy tool reserve" The former is to tell you that it is a liquidity management method, which may be bought or sold, and the latter is to tell you that in the previous monetary policy, the buying and selling of treasury bonds could not be explicitly stated, except for the special treasury bonds in 2007, all other treasury bonds could only be bought and sold under the item of "claims against other depository companies", and we could say it clearly in the future, and may even list a separate entry.
Of course, if we look at it from a long-term perspective, since the collapse of the Bretton Woods system, after losing the anchor of gold, the anchor of the currency issuance of major Western developed countries has always been government bonds, which also represents a kind of government credit.
In contrast, the vast majority of third world countries, because of the lack of government credit, their own currency can not win the trust of the public, so they have to choose to use the US dollar, euro, pound, yen and other foreign exchange as the anchor of currency issuance, China's RMB before 1994 credit is too poor, often out of control of the issuance of violent inflation, so in the case of conditions, also gradually choose to use foreign exchange as the anchor.
In the past two days, in my bond series course "If you don't understand bonds, don't talk about investment", I also specifically mentioned that the anchor of the currencies of various countries, a large proportion of which is national debt.
For example, in the United States, before the 2008 global financial crisis, more than 95% of the U.S. dollar was printed with U.S. Treasury bonds as anchors, but the proportion of national debt was reduced to 70% due to the subsequent repeated QE (quantitative easing) purchases of a large number of MBS (mortgage bonds).
However, with the Fed's balance sheet reduction since 2022, not only in terms of balance sheet size, but also in the adjustment of structure, their MBS holdings have been gradually reduced, according to Fed Governor Waller, the real and complete completion of this round of balance sheet reduction is that the amount of MBS in the Fed's balance sheet is reduced to 0, and at that time, the Fed's balance sheet will return to more than 95% of US Treasury bonds.
The euro is like this.
The yen is like this.
Therefore, if the People's Bank of China can really use government bonds as an anchor for RMB issuance, and the government can control its own hands, I firmly support it.
Now that China's economy is strong enough that the renminbi has become one of the SDR currency baskets in 2018, if the government is confident enough in its own fiscal revenue and expenditure control, using Chinese government bonds as an anchor to issue currency can be described as an act of integration with developed countries, and there is nothing to make a fuss about.
As for some people who say that the current public exchange of RMB for treasury bonds as an anchor is to disguise QE, that is, to print money on a large scale - this is even more far, and the anchor is to change the anchor, if it is only a substitution of the same amount (using treasury bonds instead of foreign exchange), it has nothing to do with QE or balance sheet reduction.
Looking directly at the size of the PBOC's balance sheet, from May 2023 to December 2023, the People's Bank of China has really been expanding its balance sheet (QE) on a large scale, with its balance sheet soaring from 41.6 trillion yuan in May to 45.7 trillion yuan in December - but since January 2024, the People's Bank of China has actually been "shrinking" its balance sheet At present, the size of the balance sheet has been reduced to 43.8 trillion yuan, and if you are interested in China's quiet QE in 2023, you can refer to my article below.
Is China quietly implementing QE?