Chinese central bank continues to normalise treasury transactions
Greater consumption needed to deal with Sino-US trade tensions. Lending to Chinese tech SMEs leaps.
Our briefing on key economic and financial developments in China as of Tuesday, 3 September, 2024:
The People’s Bank of China (PBOC) injects 100 billion yuan in liquidity via the purchase of Chinese treasuries in August, marking a further shift in its implementation of monetary policy towards international norms.
Peking University professor Huang Yiping says China needs to step up both domestic consumption and trade with Global South nations, in order to address the problem of worsening Sino-US trade relations centred around accusations of Chinese overcapacity.
China’s drive for financial inclusion and tech independence has led to an ongoing surge in micro-and-small loans, as well as lending to innovative tech SMEs. Banks continue to make copious medium and long-term loans for capital investment by heavy industry.
Chinese central bank drives open market operations towards greater trading of treasuries, injects 100B yuan in August
The People's Bank of China (PBOC) - being China's central bank, has stepped up its trading of Chinese treasuries as part of its open market operations in August, after previously committing to greater use of such transactions in its implementation of monetary policy.
On 30 August, PBOC announced that it made net purchases of Chinese treasuries in August to inject 100 billion yuan into the financial system.
According to PBOC, these transactions primarily consisted of the purchase of short-term treasuries and the sale of longer-term treasuries with selected primary dealers.
PBOC highlighted its fulfilment of the requirements of China's Central Financial Work Conference held in October last year, which called for "expanding the monetary policy tool kit, and gradually increasing the central bank's trading of treasuries in its open market operations."
Yield curve normalisation
Domestic analysts say the structure of these transactions points to efforts by PBOC to maintain the normality of China's treasury yield curve - putting pressure on short term rates while elevating longer term rates by means of the purchase and sale of treasuries at different maturities.
Zhang Xu (张旭), chief fixed-income economist at Everbright Securities, also points out that the Chinese bond market has long been hampered by an "asset drought," with liquidity exceeding available assets.
According to Zhang, this has prompted PBOC to diversify its policy toolkit for dealing with both the money market and bond markets.
"For example, when there is an asset drought, the central bank can borrow and then sell bonds to increase the supply of long-term instruments on the bond market, and balance supply and demand.
"When liquidity is too ample, PBOC can also make use of other OMO tools for targeted withdrawal, preventing the empty circulation of funds for speculative purposes within the financial system."
Coordination of monetary and fiscal policy
Unlike most other major economies, whose central banks are kept at least nominally independent to shield them from the influence of elected officials, PBOC is kept firmly under the control of the State Council, which is China’s highest organ of government.
For this reason, Chinese policymakers have the option of coordinating monetary and fiscal policy when it comes to the implementation of their macroeconomic strategies.
"The central bank's trading of treasuries strengthens the coordination of monetary policy with fiscal policy, expands the monetary policy tool kit, and is of benefit to stabilising financial markets and supporting growth of the real economy," said Ming Ming (明明), chief economist at CITIC Securities, to Diyi Caijing.
Ming Ming further notes that the net purchase of 100 billion yuan of treasuries is equivalent to a net injection of liquidity, providing further support for any financial demand from the real economy.
Earlier in the year, PBOC indicated that its increased use of treasuries as part of OMO arrives as part of efforts to refine the coordination of monetary and fiscal policy.
"PBOC is currently strengthening coordination with the Ministry of Finance, and we are jointly researching and implementing (treasury transactions)," said PBOC governor Pan Gongsheng (潘功胜) at the Lujiazui Forum in June of this year.
According to Pan, this will be a gradual process, with ongoing adjustments to the pace of treasury issuance, as well as the term structure and trustee system.
Pan also warned against viewing the increased use of treasury transactions in OMO's as a form of quantitative easing.
"[They] should be defined as a channel for the release of base money and a liquidity management tool, involving both purchases and sales," Pan said.
"They will be used in overall coordination with other instruments, to jointly operate an appropriate liquidity environment."
China needs to boost consumption and trade with global south to address US overcapacity accusations: Huang Yiping
A leading Chinese economist has called for policymakers to boost domestic consumption as well as trade with emerging economies, in order to address the problem of increasingly acrimonious relations with advanced economies led by the US.
In a recent opinion piece, Huang Yiping (黄益平), professor at Peking University's, wrote that "the US stirring up overcapacity claims" is one of the key challenges that China's policymakers face at present.
"The problem of overcapacity has always been present, and it's not the case that it's only just now emerged," Huang wrote.
"Current complexities are related to increasingly pronounced geopolitical disagreements, and China's transition from a small economic nation to a great economic nation."
Huang recommends that China's macroeconomic policy deal with this issue by "boldly supporting increases in consumption, and driving the formation of a relatively rational ratio of investment to consumption."
He also sees expansion of international trade and investment as another means of dealing with the economic headwinds posed by worsening Sino-US relations.
"[We should] firmly maintain multilateralism, and an open international trade and investment system," Huang writes.
"[We should] engage in cooperation with Belt and Road nations, and give consideration to the implementation of a Global South Green Development Plan."
New quality productive forces
Huang also highlighted the core significance of China's current focus on "new quality productive forces" (新质生产力) - a term which has risen to the fore in China's economic policy discourse after it was first unveiled by President Xi Jinping during a visit to Heilongjiang province in September 2023.
According to Huang, "new quality productive forces" will involve marshalling private enterprise and tech innovation to overcome China's prevailing economic challenges.
"The core factor for new quality productive forces is tech innovation," Huang writes.
"Out of factors which impact innovation efficiency, there are two which are highly related to the challenges that China currently faces.
"The first is national openness, and the second is the vitality of the private sector."
Lending to Chinese tech SMEs leaps 22% in 1H24
The Chinese banking system has seen accelerated growth in financial inclusion loans and lending to small tech companies in 2024, according to the latest figures from the People's Bank of China (PBOC).
As of the end of the second quarter, China's micro-and-small financial inclusion loan balance stood at 32.38 trillion yuan, for a year-on-year (YoY) rise of 16.9%, 8.1 percentage points ahead of the growth rate for all loans.
The outstanding balance of domestic and foreign currency loans to small and medium-sized tech enterprises was 3.1 trillion yuan, for a YoY rise of 21.9%, 13.6 percentage points ahead of overall loan growth.
Chinese policymakers have also pushed for strong growth in medium and long-term loans for capital investment purposes.
As of the end of the second quarter, outstanding domestic and foreign currency medium and long-term loans to Chinese industry were 23.73 trillion, for a YoY rise of 17.5%.
Of this amount, the outstanding balance of medium and long-term loans to heavy industry stood at 20.28 trillion yuan, for a YoY rise of 17.7%.
Outstanding medium and long-term loans to Chinese light industry totalled 3.45 trillion yuan, for a YoY rise of 16.5%.