‘Asset famine’ in China curbs central bank’s bond trading ambitions

BEIJING/SHANGHAI, May 27 (Reuters) – A scarcity of low-risk assets in China’s financial sector is obstructing the central bank’s plans to make its monetary policy toolkit more efficient with a return to the treasury bond market after a 17-year hiatus.

Taking its cue from an October 2023 speech by President Xi Jinping, the People’s Bank of China (PBOC) pledged recently to add treasury bond buying and selling to its toolkit, to improve an increasingly flawed monetary policy transmission mechanism.

PBOC trading – different from the quantitative easing moves seen in the West – would help deepen the bond market by improving liquidity and reducing volatility, drawing in more issuers and investors to help firms and other entities reduce their reliance on less efficient bank lending for raising funds.

But there’s a problem: China’s central government has tasked riskier local government issuers with funding investment projects for decades, making their debts unsustainable, while keeping its own balance sheet light.

Source: REUTER