The recent speech from the People's Bank of China at Shanghai Lujiazui Finance & Trade Zone Development further clarifies that the PBOC's buying and selling of national bonds does not represent quantitative easing, while also warning of risks in the bond market and expressing high concerns over long-term bond yields. The PBOC has previously indicated the potential risks of long-term government bond rates, reflecting a new mechanism for guiding expectations. In recent years, disruptions in market expectations caused by 'small essays' have been pointed out by industry experts, highlighting the importance of guiding expectations in improving the framework of monetary policy.
On June 19th, Caixin reported (Journalist: Wang Hong) that today, the Governor of the People's Bank of China, Pan Gongsheng, stated at the Lujiazui Forum that the People's Bank of China is communicating with the Ministry of Finance to jointly study and promote the gradual increase of bond trading in open market operations of the central bank. Industry experts pointed out that this Lujiazui speech further clarifies that the purchase and sale of bonds by the central bank does not represent quantitative easing, while also alerting on the risk in the bond market. Once again, the central bank expressed its high concern about long-term bond yields, emphasizing the need to maintain a normal upward sloping yield curve. In terms of product structure, the operating income of products ranging from 10-30 billion yuan is 401/1288/60 million yuan, respectively.
Actually, the central bank has continuously indicated the potential risks of long-term bond rates, reflecting the central bank's guidance and new mechanisms for expectations. Pan Gongsheng also stated at the Lujiazui Forum that he wants to establish a credible, normalized, and institutionalized policy communication mechanism. In recent years, disturbances from "small articles" have affected the market's expectations. Industry experts pointed out that guiding expectations is an important component of improving the monetary policy framework, and it is necessary for the central bank to strengthen expectation guidance. Industry insiders also recognize that after the central bank guides expectations, policy transparency and comprehensibility have significantly improved.
Why does the central bank once again warn of the risks in the bond market? According to experts' analysis, China's economy maintains a trend of rebounding and improving, financial institutions generally maintain health and stability, and under sound monetary policy, it has not yet been subject to the zero-interest rate constraints. The subscriptions and investments in the bond market are quite high, and to some extent, there are signs of "asset shortages." It is not reasonable or necessary to equate the purchase and sale of bonds, which have become a routine operation, with quantitative easing. Authoritative figures state that gradually increasing the purchase and sale of bonds in open market operations is mostly aimed at establishing basic currency channels and strengthening liquidity management tools through buying and selling bonds in the secondary market along with reverse repurchase, medium-term lending facilities, and other operations.
The position of the central bank buying and selling bonds is to widen the basic currency investment channels, rather than to implement quantitative easing. In addition, the central bank's operations on bonds involve both buying and selling, making it more flexible and not one-way.
From international experience, central banks in developed countries often implement quantitative easing under their own stage backgrounds. Typically, under the impact of crises, loose monetary policies continue to be implemented until zero-interest rate constraints are reached and the bond market still has poor liquidity, a lack of buying interest, and strong selling pressures, with poor price channel transmission. Central banks typically resort to non-traditional monetary policies, including quantitative easing (central banks' large-scale purchases of government bonds, commercial bank bills, etc.).
For example, after the 2008 international financial crisis and the 2020 impact of the new crown epidemic, central banks in developed economies generally used loose monetary policies to the extreme, implementing quantitative easing policies and providing extremely abundant liquidity to the market.
The central bank has previously stated that it attaches great importance to changes in the bond market and potential risks and will sell low-risk bonds, including government bonds when necessary.
Industry experts analyzed to Caixin that the future bond operations launched by the central bank will include both buying and selling, and will simultaneously provide risk warnings in the form of Silicon Valley Bank cases for the bond market, and once again express the central bank's high concern about long-term bond yields, emphasizing the need to maintain a normal upward sloping yield curve and maintain a positive incentive for market investments.
Experts believe that as an important manifestation of strengthened coordination between monetary policy and fiscal policy, smoothly promoting the inclusion of bond trading in the monetary policy toolbox also requires joint efforts from both parties to study the optimization of the issuance pace, term structure, and custody system of government bonds. Overall, the entire process will gradually and steadily advance.
The disturbing effects of "small articles" on market expectations are prompting the central bank to implement new mechanisms for expectation guidance.
In terms of long-term government bond yields, the central bank first expressed concern through press releases from the monetary committee meeting, and then continuously warned of the potential risks of long-term government bond rates through interviews with the Financial Times, columns in the monetary policy report, public responses to Reuters questions, and other means. It also explained the future sale of government bonds. Along with this, Pan Gongsheng has reminded on the risks in the bond market again at the Lujiazui Forum. Researchers at Caixin have noticed that this reflects the central bank's new mechanisms and highlights for expectation guidance.
In recent years, the influence of internet and self-media channels such as WeChat and Weibo has been widespread. A "small article" from self-media can cause significant disturbance to the market expectations through a butterfly effect.
During the Lujiazui forum, Pan Gongsheng, the head of the People's Bank of China, emphasized that one of the important features of the modern monetary policy framework is that the central bank can consider policies and future prospects, and communicate with the market and the public in a relatively transparent and clear manner. In addition, Pan Gongsheng also proposed to improve the credible, normalized, and institutionalized policy communication mechanism.
Industry experts stated that expectation guidance is an important component of improving the monetary policy framework. Since the outbreak of the pandemic, China's domestic demand has been insufficient, market confidence is unstable, the policy uncertainty of external developed economies has increased, and there are still some arguments internationally that belittle China's economy and macro policies. Therefore, it is necessary for the central bank to strengthen the guidance of expectations.
Market participants generally reflect that after the central bank's expectation guidance, policy transparency and comprehensibility have been significantly improved. Institutions and experts believe that as the market's understanding of the future direction and intentions of monetary policy becomes more sufficient, it is entirely possible for companies and residents to optimize expectations and proactively adjust decisions before the policy is implemented, reducing policy lag and enhancing effectiveness.