context: Rumours that quantitative easing is around the corner have permeated domestic macro debates since early 2024. Policymakers have directed central bank authorities to maintain a ‘proactive and lively’ monetary policy as the economy continues recovering in the post-Covid era, hinting that more monetary wizardry is in the cards. But quantitative easing is implemented as a last resort to revive an ailing economy. The fact that many believe it could be on the horizon reveals the negative sentiment many harbour.
PBoC (People’s Bank of China) may use purchases of treasury bonds on secondary markets as a liquidity tool, an official told the central bank-affiliated Financial News. This is the first time monetary authorities have responded to rumours it was preparing to step into markets.
October 2023’s Central Financial Work Conference called on the central bank to slowly increase its buying and selling of government bonds. The PRC is the world’s third largest bond market, with liquidity clearly increased, creating the possibility for the central bank to buy and sell, explains the bank official.
Still, the official emphasised these operations are not like quantitative easing, which can only occur when economic growth and interest rates are near zero. With growth at 5.3 percent in Q1 2024 and the seven day repo rate at 1.8 percent, these conditions are not met. PRC law also prevents PBoC from purchasing bonds on primary markets.
PBoC sees these market operations as a balance sheet tool, similar to other structural tools. Its balance sheet expanded by C¥4 tn in 2023. The bank previously engaged in bond market operations in 2000, buying and selling bonds from governments, China Development Bank and China Exim Bank. It began shifting to using more structural tools in 2003, only purchasing bonds during special bond offerings.