China’s central bank is considering increasing the trading of government bonds as a tool for managing liquidity. However, officials and experts stress that this should not be seen as quantitative easing. It is important for China to keep monetary policy stable, especially since there is still room for interest rate cuts. Experts believe that China may slightly reduce policy interest rates in the second half of the year.
Financial News, a newspaper supported by the People’s Bank of China, reported that trading treasury bonds in the secondary market can help manage liquidity and serve as a tool for monetary policy. The report mentioned that China’s treasury bond market is now the third-largest in the world, with improved liquidity allowing the central bank to buy and sell bonds in the secondary market.
Despite speculation that China might resort to quantitative easing, an unnamed PBOC official clarified that the trading of government bonds is different from QE. Quantitative easing is usually used when conventional monetary policy tools are no longer effective, such as when interest rates are close to zero. The official emphasized that China is following normal monetary policy practices.
Experts like Guo Kai, from the CF40 Institute, believe that China does not need to implement QE at the moment, as interest rates are not at zero. As long as bond purchases are not accompanied by increased fiscal spending, they do not qualify as quantitative easing.
Market analyst Channel Yeung suggested that the PBOC should maintain a cautious policy approach to avoid long-term negative effects like high inflation. Yeung also predicted that the PBOC may reduce interest rates in the second half of the year, following the global trend of central banks cutting rates.
The report also mentioned that China’s long-term government bond yields may rise with the issuance of ultra-long-term treasury bonds. The yield on China’s 10-year government bonds has decreased this year due to a shortage of risk-free financial assets, not due to economic concerns or low inflation expectations.
According to Steven Barnett from the International Monetary Fund, inflation in China is expected to recover to around 2 percent by the end of the year. This forecast was made during the launch of the IMF World Economic Outlook in Beijing.
Contributions to this story were made by Yao Yuxin. Contact email: zhoulanxv@chinadaily.com.cn.