Xi Jinping’s previous speech triggers speculation about possible monetary easing in China

Xi Jinping’s previous speech triggers speculation about possible monetary easing in China

By Ryan Woo

BEIJING (Reuters) – A phrase from a speech several months ago by Chinese President Xi Jinping has sparked speculation that the central bank may begin aggressively buying government bonds to support the economy , a stimulus measure that China has long avoided.

But most analysts say the People’s Bank of China (PBOC) will stick to traditional tools rather than resort to massive liquidity injections via “quantitative easing” (QE), as some major economies have done. like Japan and the United States.

Market expectations remain high for more stimulus measures to boost the world’s second-largest economy, which is showing tentative signs of momentum despite a long-running debt crisis in the real estate sector, which previously accounted for a quarter of the country’s gross domestic product. China.

“The People’s Bank of China should gradually increase trading of treasury bonds as part of its open market operations,” Xi said at a major financial meeting in October in an unreleased speech in the time but which was included in a book this month.

The Hong Kong-based South China Morning Post on Thursday quoted an excerpt from the book’s speech, sparking market discussions on how to interpret Xi’s words in the context of the PBOC’s reluctance to flood the system of liquidity due to fears of inflation and assets. bubbles.

China’s blue-chip stock index rebounded 0.5% from its one-month low on Thursday. Futures on the 10-year Treasury note saw their biggest rise in three weeks on Friday.

These speculations also reflect investors’ sensitivity to comments made by Xi, Chinese president for 11 years and the most powerful leader since Mao Zedong.

The PBOC did not immediately respond to a request for comment.

Xi Jinping’s previous speech triggers speculation about possible monetary easing in China

FILE PHOTO: Chinese President Xi Jinping in Beijing

AMPLE LIQUIDITY, MARCH TO REDUCE RATES

Xi’s speech “was not purchasing government bonds in the primary market, and therefore was not an indication of QE,” said Robin Xing, chief China economist at Morgan Stanley.

“In fact, in the same speech, Beijing made hawkish comments that the deleveraging process requires tighter controls on the supply of money and credit, which we believe indicates a continued preference for austerity to avoid misallocations,” Xing said in a note to investors.

The PBOC is not authorized to purchase bonds directly from the central government. She last purchased them on the secondary market in 2007.

Xi “called for replenishing the central bank’s monetary policy toolbox,” including expanding its options for trading in the open market for government bonds to manage liquidity, said Tao Wang, head of the central bank. Asian Economy and Chief China Economist at UBS Investment Bank.

Rocky Fan, an economist at Guolian Securities, said the PBOC could buy Treasuries while reducing repos, replacing one with the other.

Among other traditional policy tools, People’s Bank of China Vice Governor Xuan Changneng said last week that reducing commercial banks’ reserve requirement ratios, which now average around 7% after a reduction of 50 basis points in January, would be an important means of injecting liquidity.

Last month, the People’s Bank of China cut the prime rate on its five-year loans by 25 basis points, to 3.95 percent, the highest rate since the benchmark rate was introduced in 2019.

The People’s Bank of China last cut the one-year medium-term lending rate, a guide to the prime lending rate, in August by 15 basis points to 2.50%.

“(Other) central banks are practicing QE because their policy rates are close to zero and they can’t cut them any further, but the PBOC still has room to cut its policy rate, which is now 2.5 %,” Macquarie economists wrote in a statement. note.

China is aiming to issue special bonds of 3.9 trillion yuan ($540 billion) by local governments this year to support the economy, up from 3.8 trillion yuan last year, and 1 trillion yuan of special ultra-long-term Treasury bonds to help key sectors.

Reflecting strong demand for bonds and abundant liquidity in the financial system, China’s 30-year Treasuries yield around 2.47%, close to this month’s record low of 2.442%.

“Whether it is the money supply or the level of interest rates, the degree of monetary easing we have experienced has rarely been seen in history,” said Xia Chun, chief economist at Forthright Holdings.

($1 = 7.2239 Chinese yuan renminbi)

(Reporting by Ryan Woo; additional reporting by Samuel Shen and Jason Xue; editing by William Mallard)

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