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on august 30, the people's bank of china's official website issued the latest announcement in the "announcement of open market treasury bond trading business" column. in order to implement the relevant requirements of the central financial work conference, the people's bank of china conducted open market treasury bond trading operations in august 2024, purchasing short-term treasury bonds and selling long-term treasury bonds from some primary dealers of open market operations. the net purchase of bonds for the whole month had a face value of 100 billion yuan.

in this regard, the reporter of daily economic news interviewed lou feipeng, a researcher of postal savings bank. he said that the central bank had previously stated that it would enrich and improve the methods of basic money supply and gradually increase the purchase and sale of treasury bonds in the central bank's open market operations. the net purchase of 100 billion yuan of treasury bonds in august not only helped to enrich and improve the basic money supply and provide liquidity support, but also increased the trading activity of treasury bonds of corresponding maturities through the "buy short and sell long" operation, which helped to adjust the long-term interest rate level.

liang weichao, chief fixed income analyst at china post securities, said in an interview with the reporter of the "daily economic news" that the announcement confirmed that the central bank had conducted treasury bond buying and selling operations in august, but the scope was limited to "some" primary dealers, and the operation was not in the form of open bidding. it was most likely a small-scale targeted operation. therefore, the central bank did not directly release interest rate signals through public buying and selling, so as to avoid strong intervention and disturbance in interest rates, and there was no "interest rate control" that the market worried about in the early stage.

helps maintain an upward sloping yield curve

liang weichao analyzed in an interview with reporters that the "buy short and sell long" operation mode means that the central bank has a strong demand for the interest rate curve to "tilt upward", and also reduces the disturbance to liquidity through the simultaneous buying and selling operation mode.

in august, the net purchase was 100 billion yuan. from the perspective of liquidity, liang weichao pointed out that the injection of 100 billion yuan of medium- and long-term liquidity objectively supplemented the medium- and long-term liquidity without reducing the reserve requirement ratio. however, considering that the mlf operation in august was reduced by about 100 billion yuan, the supplement of medium- and long-term liquidity in that month was still relatively small, and the pressure on the bank's liability side was still relatively large.

on the whole, liang weichao said that if subsequent treasury bond trading operations are carried out more in the above-mentioned mode, the impact will be more focused on indirectly regulating the yield level and shape, and adjusting liquidity, rather than directly affecting bond prices.

wen bin, chief economist of china minsheng bank, analyzed that this was the first time the central bank carried out the buying and selling of treasury bonds since it announced the "borrowing and selling of treasury bonds" in july.

wen bin believes that the treasury bond trading carried out by the central bank this month is a supplement to the monetary policy toolbox and an improvement to the monetary policy framework. it is also the coordination of monetary and fiscal policies during the period of economic recovery. it falls within the scope of conventional monetary policy and is not quantitative easing due to insufficient monetary policy space.

in august, the central bank bought short and sold long government bonds, and it was a net purchase. in wen bin's view, on the one hand, it reflects the central bank's intention to regulate the government bond yield curve, maintain a reasonable term spread and long-term interest rate level of government bond interest rates, so as to avoid excessive market speculation and potential accumulation of financial risks. on the other hand, the central bank's net purchase of government bonds actually released base money to the market and increased the means of releasing liquidity. it not only maintains a suitable monetary environment for economic recovery, but also reflects the further evolution of the central bank's monetary policy framework, gradually diluting the monetary injection effect of mlf and replacing it with net purchase of government bonds. the subsequent mlf maturity is large (from september to december, the mlf maturity is 591 billion, 789 billion, 1450 billion, and 1450 billion yuan respectively), or ushering in a replacement window period, which can also play a role in diluting the color of the mlf policy interest rate.

wen bin said that if the central bank announces its open market purchases and sales at the end of each month in the future, it may have a certain monetary policy signal effect, increase the transparency of monetary policy, and achieve better expectations management.

wen bin further pointed out that the central bank's net purchase of treasury bonds this month shows the central bank's supportive monetary policy stance and indicates a reasonable and abundant liquidity in the future. in addition, it will also send a signal to the market about the control of the treasury yield curve. the central bank's purchase of short and long this month shows the central bank's risk control attitude towards long-term interest rates. the possibility of a sharp downward breakthrough in the long-term bond market interest rate is low, and short-term products may be more popular due to their good liquidity and the allocation needs of non-bank institutions.

positioned as a base money supply channel and liquidity management tool

looking back at the progress of treasury bond trading, pan gongsheng, governor of the people's bank of china, previously publicly pointed out that the secondary market treasury bond trading will be gradually included in the monetary policy toolbox. he said that the central bank has been constantly enriching and improving the methods of base money injection. there was a period of time in history when the base money was passively injected mainly through foreign exchange reserves; since 2014, with the reduction of foreign exchange reserves, the central bank has developed and improved the mechanism of actively injecting base money through tools such as open market operations and medium-term lending facilities.

in recent years, with the rapid development of my country's financial market, the scale and depth of the bond market have gradually increased, and the conditions for the central bank to inject base money through the purchase and sale of treasury bonds in the secondary market have gradually matured. last year's central financial work conference proposed to enrich the monetary policy toolbox and gradually increase the purchase and sale of treasury bonds in the central bank's open market operations. the people's bank of china and the ministry of finance have strengthened communication and jointly studied and promoted implementation. this process is overall gradual, and the pace of treasury bond issuance, maturity structure, and custody system also need to be studied and optimized simultaneously.

pan gongsheng emphasized that it should be noted that incorporating treasury bond trading into the monetary policy toolbox does not mean implementing quantitative easing, but rather positioning it as a channel for base money injection and a liquidity management tool, involving both buying and selling, and combined with other tools to create a suitable liquidity environment.

the china monetary policy implementation report (q2 2024) further clarified the implementation of treasury bond borrowing operations. it mentioned that the people's bank of china carefully studied and promoted the implementation of specific plans, and flexibly arranged supporting measures according to the situation of the bond market. since the beginning of this year, the yield of treasury bonds has continued to decline rapidly. in late june, the yield of 10-year treasury bonds approached the 2.2% mark, a 20-year low, and has obviously deviated from the reasonable central level, accumulating financial risks. on july 1, the people's bank of china issued an announcement announcing the implementation of treasury bond borrowing operations. if necessary, it will choose to sell in the open market to balance the supply and demand of the bond market and correct and block the accumulation of financial market risks.

on july 22, after the 7-day reverse repurchase operation rate was lowered, the people's bank of china announced that starting from that month, mlf participating institutions with demand to sell medium- and long-term bonds could apply for a phased reduction or exemption of mlf collateral, increase the scale of tradable bonds, and ease supply and demand pressures in the bond market.