A scarcity of low-risk assets in China's financial industry is impeding the central bank's plans to expand its monetary policy arsenal by returning to the government bond market after a 17-year absence. Following a mandate from President Xi Jinping's speech in October 2023, the People's Bank of China (PBOC) has committed to restoring treasury bond trading to fix its increasingly weak monetary policy transmission mechanisms.<o:p></o:p>

The PBOC's bond trading effort aims to strengthen the bond market by increasing liquidity and decreasing volatility. This approach aims to attract additional issuers and investors, allowing businesses and other entities to lessen their reliance on inefficient bank loans. However, in the past, the central government has used riskier local government issuers to fund investment projects, resulting in unsustainable debts while maintaining a light balance sheet. As a result, there are currently insufficient liquid benchmarks to support a vibrant bond market.<o:p></o:p>

"Using treasury bond trading as the main market operation tool would greatly improve the PBOC's monetary policy framework, especially interest rate transmission," said a policy consultant who requested to remain anonymous owing to the sensitive nature of the subject. "But the conditions are not right. We have an asset famine."<o:p></o:p>

The PBOC did not immediately respond to a request for comment. In a statement to Reuters on May 8, it stated that bond trading "can be used as a liquidity management method and a reserve of monetary policy tools," highlighting that the trade would be "two-way."<o:p></o:p>

Distortions in the Chinese bond market were underlined last week with the release of the first batch of ultra-long government notes this year, where prices jumped 20 per cent on illiquid platforms, pushing yields below central bank policy rates and causing trading suspensions. More issuance is anticipated through November, totalling 1 trillion yuan ($138 billion), or approximately 0.8 per cent of GDP.<o:p></o:p>

In April, state media quoted an unidentified central bank official as saying that government bond issuance needed to be large and consistent to avoid significant interest rate fluctuation. The prevalence of credit in the Chinese economy, which is primarily controlled by state institutions, has generated worries about capital misallocation. Repeated rate cuts and liquidity injections by the central bank have failed to alleviate deflationary concerns.<o:p></o:p>

Analysts point out that cheap finance continues to flow to state-owned enterprises with large production capabilities, regardless of project quality, whilst private firms receive less favourable loan conditions due to perceived increased risks. According to the central bank, significant amounts of money sit idle in the financial sector rather than moving into the real economy.<o:p></o:p>

The analysts at Rhodium Group pointed out that "what corporates in China seem to be doing is taking cheap 2-3 per cent bank loans and channelling the money back into banks' wealth management products, long-term time deposits, or other investment products." According to China bond data, Chinese businesses are the world's second-largest bond issuers after the United States, with bonds worth approximately 106 trillion yuan, accounting for 84 per cent of GDP. This includes roughly 30 trillion yuan in treasury bonds, which are typically issued by local governments and policy banks and held by banks until they mature.<o:p></o:p>

The PBOC last purchased bonds in 2007 to form the sovereign wealth fund China Investment Corp. Its current holdings are 1.52 trillion yuan or around 3.5 per cent of its total assets. Low turnover makes it difficult to use these holdings to increase liquidity in secondary markets and effectively manage the yield curve. Selling could raise yields, tightening financial conditions amid a hard 5 per cent growth objective, whilst purchasing could push yields too low and deepen the already negative 200 basis point spread with US benchmarks, creating capital outflow concerns, and depressing the yuan currency.<o:p></o:p>

To proceed, the PBOC may need to wait for more issues to enter the market, limit its purchases to tiny amounts, and carefully time any purchases to prevent impressions of deficit monetisation. Shuang Ding, Standard Chartered's head economist for Greater China and North Asia, predicts the PBOC would "initially buy a small amount, and trade both ways." He points out that it will take a "relatively long period" for PBOC trading to "serve as a tool to inject liquidity."<o:p></o:p>

Ting Lu, Nomura's senior China economist, believes the PBOC will launch bond trading "perhaps within the next six months, though the timing is highly uncertain." He suggests that the PBOC might choose a period of volatile interbank rates to stabilise the market.<o:p></o:p>

(With inputs from Reuters)<o:p></o:p>

A scarcity of low-risk assets in China's financial industry is impeding the central bank's plans to expand its monetary policy arsenal by returning to the government bond market after a 17-year absence.

A scarcity of low-risk assets in China's financial industry is impeding the central bank's plans to expand its monetary policy arsenal by returning to the government bond market after a 17-year absence. Following a mandate from President Xi Jinping's speech in October 2023, the People's Bank of China (PBOC) has committed to restoring treasury bond trading to fix its increasingly weak monetary policy transmission mechanisms. The PBOC's bond trading effort aims to strengthen the bond market by increasing liquidity and decreasing volatility. This approach aims to attract additional issuers and investors, allowing businesses and other entities to lessen their reliance on inefficient bank loans. However, in the past, the central government has used riskier local government issuers to fund investment projects, resulting in unsustainable debts while maintaining a light balance sheet. As a result, there are currently insufficient liquid benchmarks to support a vibrant bond market. "Using treasury bond trading as the main market operation tool would greatly improve the PBOC's monetary policy framework, especially interest rate transmission," said a policy consultant who requested to remain anonymous owing to the sensitive nature of the subject. "But the conditions are not right. We have an asset famine." The PBOC did not immediately respond to a request for comment. In a statement to Reuters on May 8, it stated that bond trading "can be used as a liquidity management method and a reserve of monetary policy tools," highlighting that the trade would be "two-way." Distortions in the Chinese bond market were underlined last week with the release of the first batch of ultra-long government notes this year, where prices jumped 20 per cent on illiquid platforms, pushing yields below central bank policy rates and causing trading suspensions. More issuance is anticipated through November, totalling 1 trillion yuan ($138 billion), or approximately 0.8 per cent of GDP. In April, state media quoted an unidentified central bank official as saying that government bond issuance needed to be large and consistent to avoid significant interest rate fluctuation. The prevalence of credit in the Chinese economy, which is primarily controlled by state institutions, has generated worries about capital misallocation. Repeated rate cuts and liquidity injections by the central bank have failed to alleviate deflationary concerns. Analysts point out that cheap finance continues to flow to state-owned enterprises with large production capabilities, regardless of project quality, whilst private firms receive less favourable loan conditions due to perceived increased risks. According to the central bank, significant amounts of money sit idle in the financial sector rather than moving into the real economy. The analysts at Rhodium Group pointed out that "what corporates in China seem to be doing is taking cheap 2-3 per cent bank loans and channelling the money back into banks' wealth management products, long-term time deposits, or other investment products." According to China bond data, Chinese businesses are the world's second-largest bond issuers after the United States, with bonds worth approximately 106 trillion yuan, accounting for 84 per cent of GDP. This includes roughly 30 trillion yuan in treasury bonds, which are typically issued by local governments and policy banks and held by banks until they mature. The PBOC last purchased bonds in 2007 to form the sovereign wealth fund China Investment Corp. Its current holdings are 1.52 trillion yuan or around 3.5 per cent of its total assets. Low turnover makes it difficult to use these holdings to increase liquidity in secondary markets and effectively manage the yield curve. Selling could raise yields, tightening financial conditions amid a hard 5 per cent growth objective, whilst purchasing could push yields too low and deepen the already negative 200 basis point spread with US benchmarks, creating capital outflow concerns, and depressing the yuan currency. To proceed, the PBOC may need to wait for more issues to enter the market, limit its purchases to tiny amounts, and carefully time any purchases to prevent impressions of deficit monetisation. Shuang Ding, Standard Chartered's head economist for Greater China and North Asia, predicts the PBOC would "initially buy a small amount, and trade both ways." He points out that it will take a "relatively long period" for PBOC trading to "serve as a tool to inject liquidity." Ting Lu, Nomura's senior China economist, believes the PBOC will launch bond trading "perhaps within the next six months, though the timing is highly uncertain." He suggests that the PBOC might choose a period of volatile interbank rates to stabilise the market. (With inputs from Reuters)

China's scarcity of low-risk assets hinders the central bank’s treasury bond market plans

A former adviser to the People's Bank of China (PBOC), Li Daokui, has offered a sobering assessment of China's property market, suggesting that it may take up to a year to fully recover. According to a report by Bloomberg, Li is urging the Chinese government to take proactive steps to boost lending to property developers in order to prevent further defaults.

Li Daokui, a former member of the PBOC's monetary policy committee, revealed in an interview that while property sales in China's major cities could potentially rebound in the next four to six months, smaller cities may require up to a year to experience substantial recovery.

“The collapse in the property market over the past two years has left real estate giants close to default, triggered market panic, and left housing projects unfinished,” Bloomberg quoted Li as saying. He further emphasised on the severity of the situation. He proposed the creation of a mechanism to increase bank lending to property developers, estimating that approximately 100 billion yuan ($13.7 billion) would be needed to support developers during the ongoing downturn.

Li, a well-known academic and commentator on China's economy, served as an adviser at the PBOC from 2010 to 2012 and currently directs the Academic Centre for Chinese Economic Practice and Thinking at Tsinghua University in Beijing.

Bank lending to the real estate sector has seen a significant decline in recent years due to rising financial distress. Loans for property development have dropped every month since April, registering a 25 per cent year-on-year decline in August.

"Some developers are overweight in third and fourth-tier cities, so their financial situation won't be able to improve in the coming six months," Bloomberg cited Li. "In the meantime, increased lending by commercial banks is still extremely important in order to prevent any propagation of liquidity problems. Some policy has to be in place to stop the shrinking of bank lending," he added.

Li proposed that the central bank or the National Financial Regulatory Administration, which oversees banks, could form a committee with the nation's six largest commercial banks to jointly provide loans to support the property sector.

In the long term, Li believes that China's property sales could stabilise at 1.1-1.2 billion square meters annually, compared to a peak of about 1.8 billion square meters in 2021. He expects the property market to remain a key driver for the economy but with a reduced impact.

While Li does foresee the possibility of another interest rate cut by the PBOC before the end of the year, he does not anticipate numerous or major cuts due to relatively low profit margins for banks. Instead, he stressed that policies to stimulate demand for consumer goods and housing would be more effective in supporting the economy.

Li expressed anticipation for the release of more detailed plans for the resolution of local government debt, which, combined with measures to bolster the property sector, would be "much more important than cutting the interest rate". These actions are intended to address the fundamental problems with China's macroeconomic structure and financial system, where the demand for loans has fallen off recently.

(With inputs from Bloomberg)

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A former adviser to the People's Bank of China (PBOC), Li Daokui, has offered a sobering assessment of China's property market, suggesting that it may take up to a year to fully recover.

A former adviser to the People's Bank of China (PBOC), Li Daokui, has offered a sobering assessment of China's property market, suggesting that it may take up to a year to fully recover. According to a report by Bloomberg, Li is urging the Chinese government to take proactive steps to boost lending to property developers in order to prevent further defaults. Li Daokui, a former member of the PBOC's monetary policy committee, revealed in an interview that while property sales in China's major cities could potentially rebound in the next four to six months, smaller cities may require up to a year to experience substantial recovery. “The collapse in the property market over the past two years has left real estate giants close to default, triggered market panic, and left housing projects unfinished,” Bloomberg quoted Li as saying. He further emphasised on the severity of the situation. He proposed the creation of a mechanism to increase bank lending to property developers, estimating that approximately 100 billion yuan ($13.7 billion) would be needed to support developers during the ongoing downturn. Li, a well-known academic and commentator on China's economy, served as an adviser at the PBOC from 2010 to 2012 and currently directs the Academic Centre for Chinese Economic Practice and Thinking at Tsinghua University in Beijing. Bank lending to the real estate sector has seen a significant decline in recent years due to rising financial distress. Loans for property development have dropped every month since April, registering a 25 per cent year-on-year decline in August. "Some developers are overweight in third and fourth-tier cities, so their financial situation won't be able to improve in the coming six months," Bloomberg cited Li. "In the meantime, increased lending by commercial banks is still extremely important in order to prevent any propagation of liquidity problems. Some policy has to be in place to stop the shrinking of bank lending," he added. Li proposed that the central bank or the National Financial Regulatory Administration, which oversees banks, could form a committee with the nation's six largest commercial banks to jointly provide loans to support the property sector. In the long term, Li believes that China's property sales could stabilise at 1.1-1.2 billion square meters annually, compared to a peak of about 1.8 billion square meters in 2021. He expects the property market to remain a key driver for the economy but with a reduced impact. While Li does foresee the possibility of another interest rate cut by the PBOC before the end of the year, he does not anticipate numerous or major cuts due to relatively low profit margins for banks. Instead, he stressed that policies to stimulate demand for consumer goods and housing would be more effective in supporting the economy. Li expressed anticipation for the release of more detailed plans for the resolution of local government debt, which, combined with measures to bolster the property sector, would be "much more important than cutting the interest rate". These actions are intended to address the fundamental problems with China's macroeconomic structure and financial system, where the demand for loans has fallen off recently. (With inputs from Bloomberg) WATCH WION LIVE HERE

Former PBOC adviser cautions: China's property recovery may take a year

China's central bank the people’s bank of china popularly known as People's Bank of China (PBOC) has purchased 1.75 crore shares in one of India's largest housing finance lenders, HDFC.&nbsp;

According to reports the deal that possibly happened in the March quarter has raised the total stake of PBOC in Indian firm to a little over 1 per cent. &nbsp;The shares of HDFC have come down by over 32% since the slide of Indian markets begun to post the outbreak of coronavirus.​&nbsp;

HDFC also owns over 20 per cent stake in HDFC bank, India's leading private sector bank. PBOC, an existing shareholder of HDFC earlier owned 0.8 per cent in the company as of March 2019.&nbsp;

The disclosure to stock exchanges has been made now since the stake has hit the 1 per cent regulatory threshold.&nbsp;

Amid the stock market crash, china has been buying stakes across major Asian financial institutions. Earlier in 2014, PBOC had picked up stakes in many high profile Italian companies during the eurozone debt crisis.

According to reports, Chinese banks were looking for newer avenues of investments in India.

The price at which shares were purchased could not be confirmed.HDFC stock saw a 33 per cent correction during the January-March quarter - from Rs 2,433.75 on January 1 to Rs 1,630.45 on March 31.

It had hit a low of Rs 1,501.80 apiece on the BSE on March 24, from where it saw a sharp rally to Rs 1,754 on March 27.

Central banks typically have investments in various asset classes including gold, foreign currencies and also bonds, including both government and corporate ones.&nbsp;

(With inputs from agencies)

China's central bank the people’s bank of china popularly known as People's Bank of China (PBOC) has purchased 1.75 crore shares in one of India's largest housing finance lenders, HDFC.

China's central bank the people’s bank of china popularly known as People's Bank of China (PBOC) has purchased 1.75 crore shares in one of India's largest housing finance lenders, HDFC. According to reports the deal that possibly happened in the March quarter has raised the total stake of PBOC in Indian firm to a little over 1 per cent. The shares of HDFC have come down by over 32% since the slide of Indian markets begun to post the outbreak of coronavirus. HDFC also owns over 20 per cent stake in HDFC bank, India's leading private sector bank. PBOC, an existing shareholder of HDFC earlier owned 0.8 per cent in the company as of March 2019. The disclosure to stock exchanges has been made now since the stake has hit the 1 per cent regulatory threshold. Amid the stock market crash, china has been buying stakes across major Asian financial institutions. Earlier in 2014, PBOC had picked up stakes in many high profile Italian companies during the eurozone debt crisis. According to reports, Chinese banks were looking for newer avenues of investments in India. The price at which shares were purchased could not be confirmed.HDFC stock saw a 33 per cent correction during the January-March quarter - from Rs 2,433.75 on January 1 to Rs 1,630.45 on March 31. It had hit a low of Rs 1,501.80 apiece on the BSE on March 24, from where it saw a sharp rally to Rs 1,754 on March 27. Central banks typically have investments in various asset classes including gold, foreign currencies and also bonds, including both government and corporate ones. (With inputs from agencies)

China's central bank  buys 1.75 crore shares in HDFC, raises stake to over 1%

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