Chinese Central Bank Governor Dismisses Bond Trading As Monetary Easing Tool, Economists Note It Is A More Frequent Necessity

Pan Gongsheng, governor of the Chinese central bank, People’s Bank of China, dismissed the idea that its bond trading is a form of massive monetary easing.

What Happened: Gongsheng clarified that the bond trading would be a liquidity management tool involving both buying and selling, the Wall Street Journal reported on Wednesday. The PBOC and the finance ministry are exploring ways to incorporate treasury bond trading into their policy toolkit.

He emphasized that this practice would not be equivalent to quantitative easing, a strategy where monetary authorities acquire assets like government bonds to reduce yields after exhausting traditional policy tools.

The PBOC’s bond trading will be a gradual process, and the issuance pace, maturity structure, and custody mechanism for China’s treasury bonds will also need to be optimized, Gongsheng added.

Speculation about the PBOC’s bond trading activities has been fueled by a speech from President Xi Jinping in October. The PBOC has generally avoided direct trading of government bonds in secondary markets, opting instead for liquidity injections through various lending facilities.

Economists note that while there is still room to reduce reserve requirements, the scope has narrowed, making bond trading a more frequent necessity for the PBOC.

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Why It Matters: The PBOC’s bond trading strategy comes at a time of significant economic uncertainty in China. On Monday, the PBOC decided to keep its key interest rate unchanged for the tenth consecutive month to stabilize the yuan and manage liquidity. This decision aligns with the forecast in a Bloomberg survey and reflects the central bank’s cautious approach amid economic challenges.

Additionally, China’s housing market has been struggling, with manufacturing also falling short of expectations, deepening economic concerns.

Earlier in the month, Chinese property stocks tumbled into a bear market despite government efforts to stabilize the sector. This highlights the ongoing challenges faced by the Chinese economy.

In February, China experienced a stock market downturn of $7 trillion. This occurred amid soaring debt levels and significant market pullbacks from their 2021 peaks.

Photo courtesy: Shutterstock

This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote