China finance ministry voices support for central bank bond trading

livemint.com:

China’s finance ministry has said it is in favor of the central bank resuming trading Treasury bonds, a move that would see the monetary authority dust off a rarely used tool in its policy kit. Officials at the ministry said that they would support the People’s Bank of China gradually restarting to trade Treasury bonds in open-market operations as they look to better coordinate the country’s fiscal and monetary policies.

The remarks, published in the state-run People’s Daily on Tuesday, come after the publication of a months-old speech by President Xi Jinping sparked speculation about whether the central bank would resort to the measure to help boost liquidity in the still-fragile economy. China’s central bank officials haven’t made any treasury bond trades since October last year and have mostly refrained from making bond-related comments recently.

Last week, the central bank cautioned against large-scale monetary easing after recent data pointed to a slowdown in bank lending. It reiterated a wary stance on injecting big amounts of liquidity into the economy, saying it isn’t a case of “the more, the better." There was no specific mention of Treasury bonds.

For many economists, it seems unlikely that China’s central bank will launch U.S.-style quantitative easing, in which a central bank loads up on government bonds and other assets to push down yields. It still has room to ease monetary policy via more traditional means, and also needs to take into account tepid borrowing demand, narrowing profit margins at banks, a weak currency and the uncertain timeline of rate cuts by the Federal Reserve, economists say.