MNI: PBOC To Increase Bond Buying, Fiscal Coordination In 2025
MNI (BEIJING) - The People’s Bank of China will increase its treasury purchases in 2025 as it aims to coordinate more closely with Beijing’s expansionary fiscal policy and boost credit demand, former officials told MNI, noting fresh stimulus will likely see China’s deficit-to-GDP ratio climb 1 percentage point to 4% next year.
Authorities will also significantly increase off-the-book debt, including about CNY2 trillion of special treasuries and over CNY4 trillion of local government special bonds (LGSBs) next year, which may push the broader, unofficial deficit-to-GDP ratio closer to a record 9% from the current circa 7%, the officials predicted.
The fiscal expansion will encourage credit demand by supporting consumption and investment, ultimately improving the effectiveness of monetary easing, the officials said. Tight fiscal conditions driven by falling land-sale revenue and increasing debt repayments have contributed to the decline in M1 – which has fallen since April to a record -7.4% in September – as private-sector spending and borrowing were dragged down by real estate and the slower economy, making the transmission of monetary easing harder, they added.
The poor M1 reads amid loose monetary policy indicated sluggish credit demand has led to idle funds cycling inside the financial system, the officials argued. The coordination between expansionary fiscal and accommodative monetary policy will form a benign situation where the government is the ultimate borrower and the payer, while the central bank works as market maker and lender of last resort, they explained.
The Politburo’s message of coordination between fiscal and monetary policy following Monday's meeting sent a positive signal to the real-estate sector and the broader economy, the officials noted. (See MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials) The meeting also stressed a “more proactive” fiscal policy, an expression not used since 2020.
While the Bank will increase its bond purchases, favouring short-term debt, its balance sheet will see slower growth as financial firms accelerate their medium-term lending facility (MLF) repayments, the officials explained.
MONEY SUPPLY REFORM
The central bank has recently accelerated the use of its new bond trading tools, buying CNY500 billion of treasuries via open market transactions since August and CNY800 billion through the outright reverse repo up to November as it aims to maintain “reasonable levels of market liquidity”.
The PBOC will also use the large debt expansion to increase its treasury holdings and reform its money-supply system to anchor it to government debt issuance – similar to the Federal Reserve’s use of bond trading – downplaying the role of certain tools such as the MLF, the officials noted.
The Bank could also use treasury purchases as a policy option should reserve requirements approach its 5% redline, which will limit the PBOC’s capacity to inject long-term liquidity via reserve requirement ratio cuts, the officials said. (See MNI INTERVIEW: PBOC To Ease Further In 2025 - CITIC's Ming)