MNI: PBOC Eyes Secondary CGB Trading To Support Issuance

The People’s Bank of China is set to restart treasury trades on the secondary market after a 16-year hiatus as it prepares to support long-term Chinese government bond issuance over the next few years, however, it will aim to limit its role and maintain a small portfolio as it pushes fiscal discipline, policy advisors and economists told MNI.

Lian Ping, chairman at the China Chief Economist Forum, welcomed the potential move, pointing to the impending offer of the CNY1 trillion special treasuries this year, which provided a good entry point should the PBOC decide to enter the market. (See MNI INTERVIEW: China Eyes Significant Special Treasury Issuance)

The Ministry of Finance this week unveiled plans to issue a total of CNY1 trillion in ultra-long CGBs this year. The bonds will have tenors of 20, 30 and 50 years, and will launch separately between May and November.

FISCAL DISCIPLINE KEY

An advisor familiar with monetary policy told MNI the PBOC is still discussing the role it will take when authorities begin issuing the ultra-long special treasuries. The central bank prefers a small-scale allocation, should it choose to enter the market, or it could decide to hold off as it gauges demand, the advisor noted.

PBOC and fiscal authority officials and advisors have debated the merits of the central bank purchasing CGBs for some time. The argument came to a head last month when both sides stated publicly bond purchases could work as a monetary-policy tool.

PBOC officials noted CGB purchases will help manage liquidity, stressing the operation is “fundamentally different” from the quantitative easing measures taken by other central banks due to the “two-way” nature of the trades.

The central bank will push “fiscal discipline” as a priority to avoid any suggestion it should buy government bonds at a fast pace and inject more currency aimed at “rigid fiscal need,” which would stoke inflation and weaken the yuan, the advisor warned.

The PBOC holds CNY1.5 trillion of CGBs, about 3.5% of its total assets and 5% of outstanding transactions, according to its balance sheet. Special treasury bonds purchased in 2007 from the Agricultural Bank of China account for about CNY1.4 trillion of the portfolio.

Lian suggested the PBOC should gradually increase its CGB holdings to above 5% of its total assets, as its current level is too small to manage liquidity and money-market rates at an effective pace.

The advisor, however, said ample liquidity in the wholesale market had pushed down long-term interest rates and market appetite for additional special CGBs would remain robust, making PBOC intervention less likely at present.

YUAN SUPPORT

Hao Yubiao, professor of the School of Economics at the Capital University of Economics and Business, said the PBOC’s CGB purchases represented an important mechanism to inject base money and boost demand for the deals, which will help shore up the government bond market. The trades will also improve the role CGBs play setting benchmark rates, particularly as China continues to liberalise its interest-rate system and currency injection tools, he added.

Current open market operations, such as reverse repo and medium-term lending facilities, target large institutions – hardly a long-term and universal mechanism, Hao argued.

The PBOC will also see CGB purchases as a necessary policy tool as room for rate and reserve requirement ratio cuts has shrunk, he added, noting average RRR is now 7% and approaching the Bank’s 5% redline, while the U.S. Federate Reserve remains in a tightening stance.

Authorities must also monitor closely the capacity for China’s commercial banks to increase holdings of CGBs significantly, Lian explained, pointing to their surging loan-deposit ratios in recent years.

Lender liquidity may suffer and limit their ability to take on significant CGB exposure, Lian explained, noting the situation is unlikely to see an obvious improvement in the short term.