Amid Debt Crisis, China’s Central Bank Purchases $56.3 Billion worth of Special Government Bonds
In the last two decades, the central bank has refrained from purchasing such bonds in the secondary market, except for a one-time occurrence in 2007 when China’s stock market experienced a downturn.
The People’s Bank of China (PBOC) recently disclosed that it acquired 400 billion yuan ($56.3 billion) in special government bonds from primary dealers. Economists believe this move reflects the hurdles faced by the communist regime, with investors and banks seeing these bonds as a safer bet in a declining economy.
This purchase included 300 billion yuan ($42.3 billion) in 10-year term bonds and 100 billion yuan ($14.1 billion) in 15-year term bonds. The PBOC clarified that these acquisitions were part of open market operations conducted on Aug. 29 and were communicated through an announcement on their official website.
Additionally, the PBOC introduced a new section titled “Open Market Treasury Bond Trading Business Announcement” on their website last week, suggesting that government bond purchases may become a regular practice in the future.
Per China’s banking laws, the central bank is restricted from directly procuring treasury bonds in the primary market. However, there are no barriers to buying and selling these bonds through primary dealers in the open or secondary market.
“Primary dealers are entities like state-owned banks, securities companies, and trust funds that directly engage with the central bank,” explained Davy J. Wong, a Chinese American economist.
According to Sun Kuo-hsiang, a professor at Nanhua University, transactions in the primary market involve the initial issuance of financial instruments like stocks and bonds, with funds going directly to the issuer.
Related Stories
For the past two decades, the PBOC has steered clear of acquiring such bonds in the secondary market, with an exception in 2007 during a stock market plunge when the central bank acquired 1.35 trillion yuan ($190.3 billion) in special government bonds in the secondary market.
Sun emphasized that secondary market transactions do not involve funds flowing back to the issuer but are traded among investors.
Wong clarified that the “secondary market is akin to the general private market, where individuals can buy and sell bonds, showcasing the distinction between primary and secondary markets.”
Sun highlighted that the substantial bond purchases by the PBOC underscore the severe economic challenges facing China.
He cautioned that this move might weaken investor confidence in RMB assets, prompting capital outflows and market instability.
Printing Money, Rolling Over Debt
Wong explained that the PBOC’s recent bond acquisitions are aimed at rolling over maturing government bonds. This process involves purchasing old bonds nearing maturity from primary dealers and commercial banks and then issuing new bonds through the Ministry of Finance.
Meanwhile, CCP’s official media denied that the PBOC’s actions constitute quantitative easing or monetization of China’s fiscal deficit.
A bank employee counts 100-yuan notes at a bank counter in Nantong, in China’s eastern Jiangsu Province, on June 13, 2023. STR/AFP via Getty Images
Sun observed that the central bank’s bond purchases can be seen as a form of “money printing” as it expands the money supply through asset acquisitions.
Wong echoed this sentiment, highlighting the continuous cycle of issuing new bonds to offset old debt, a practice unique to communist China.
Henry Wu, an economist, pointed out that this situation leads to unlimited money printing without substantial value, an ominous sign typical of declining dynasties.
Luo Ya contributed to this report.
