China’s central bank, the People’s Bank of China (PBOC), has announced that it purchased 400 billion yuan ($56.3 billion) in special government bonds from primary dealers. This move is seen as a reflection of the challenges faced by the communist regime, as investors and banks consider these bonds to be a safer option in a declining economy.
The PBOC revealed that it acquired the special government bonds from primary dealers through open market operations on August 29th. The purchase included 300 billion yuan ($42.3 billion) worth of 10-year term bonds and 100 billion yuan ($14.1 billion) worth of 15-year term bonds.
In addition, the PBOC recently added a new section called ”Open Market Treasury Bond Trading Business Announcement” to its official website, indicating that its purchase of government bonds may become more common in the future.
According to China’s bank laws, the central bank is not allowed to directly buy treasury bonds in the primary market. However, there are no restrictions on buying and selling treasury bonds in the open market through primary dealers or in the secondary market.
Davy J. Wong, a Chinese American economist, explained that primary dealers are state-owned banks, securities companies, and trust funds that directly interact with the central bank.
Sun Kuo-hsiang, a professor at Nanhua University in Taiwan specializing in international affairs and business, stated that primary dealers have a unique position in the market as they can participate directly in issuing government bonds and conduct policy transactions with the central bank. This allows for effective influence over market interest rates and liquidity.
Historically, except for an instance during China’s stock market downturn in 2007 when it bought $190.3 billion worth of special government bonds on secondary markets; PBOC has avoided purchasing such bonds outside of open markets.
Sun emphasized that this large-scale bond purchase by PBOC highlights severe challenges for China’s economy including weak economic growth and weakening investment demand forcing aggressive monetary policies; investors seeking assets leading to declining long-term bond yields indicating lack of confidence; high levels of central and local government debt limiting fiscal policy options necessitating support from monetary policy measures.
However beneficial this bond purchase may be for alleviating liquidity pressure within markets; Sun warned about potential negative impacts such as increased concerns about inflation risks due to excessive reliance on money printing by PBOC which could weaken investor confidence leading to capital outflows and instability within markets.