For The People's Bank of China, Bond Buying is Is Both Easy and Hard

        China's central bank has long been critical of the bond-buying programs adopted by its counterparts in developed countries. Now, it's pondering its own version of such easing and a close look at its balance sheet shows it has room to do just that.
        Under deliberations at the People's Bank of China is a proposal that could allow commercial banks to swap local-government bailout funds for cash as a way to bolster liquidity and boost lending, according to people familiar with the talks.
        Government bonds represented only 4.5% of all of the 33.8 trillion yuan (or $5.5 trillion) in assets held by the Chinese central bank as of the end of last year. By comparison, 55% of the assets owned by the U.S. Federal Reserve consisted of government securities.
        The vast majority of the PBOC's balance sheet -- 80% as of the end of 2014 -- was made up of foreign-exchange reserves that had piled up over the years as the central bank bought dollars off the country's exporters and simultaneously sold the yuan -- its longstanding playbook to keep the Chinese currency from appreciating in value.
        The small share of its government holdings reflects the rather limited size of China's bond market, according to analysts and economists. In addition, the PBOC so far has only bought and sold government bonds in the open market on a small scale, with the main goal to adjust liquidity in the interbank market where banks borrow from each other.
        Now, as the Chinese central bank is considering ways to prevent a stranglehold on liquidity in the financial system as local governments are about to begin a debt-for-bond swap program, some economists say the PBOC should expand its holdings of government securities by directly purchasing those local-government bonds once they are issued.
        Such a move by the PBOC, they say, could amount to the Chinese version of "quantitative easing," also known as QE, or an unconventional bond-buying program adopted by central banks in the U.S., Europe and Japan to drive down interest rates and stimulate growth. But others say that even if the PBOC launches its own version of bond purchases, it wouldn't be of the same scale as the one employed by the U.S. Federal Reserve to pull the world's largest economy out of its most recent recession.
        The goal of any Chinese bond buying, they say, would be to help Beijing's effort to alleviate the debt-repayment burdens of city halls and townships across the country, as localities would be able to roll over their existing debts -- mostly short-term bank loans -- with long-term bonds with relatively low interest rates. In that case, "it wouldn't be the same as quantitative easing in its strictest sense," said Liang Hong, chief economist at investment bank China International Capital Corp.
        So far, the PBOC has shown little indication that it would get involved in the local-government-bond bailout program by directly purchasing bonds to be issued by localities. PBOC Gov. Zhou Xiaochuan has repeatedly criticized the quantitative-easing programs adopted by other central banks. Most recently, in March, Mr. Zhou warned that continued quantitative-easing measures taken by some of his counterparts could make the U.S. dollar "too strong" and cause capital to flow into the U.S. market.
        On the other hand, the Chinese central bank is weighing a more indirect approach, The Wall Street Journal reported on Sunday. That would involve allowing commercial banks to use local-government bonds they purchase as collateral to borrow from the central bank, in a move similar to the one taken by the European Central Bank in the past few years.
        Such a step would be aimed at ensuring adequate liquidity in the system, as the central bank can no longer rely on large amounts of capital inflows to maintain its monetary base.
        "The PBOC could use this opportunity to provide low-cost funding to commercial banks and guide down market rates," said economist Zhu Chaoping at UOB Kay Hian Holdings Ltd., a Singapore-based brokerage firm. "As a result, the PBOC may be in a position to indirectly buy government bonds, which will have similar effects as the quantitative easing by the U.S. Fed," Mr. Zhu added.
        -- Lingling Wei. Follow her on Twitter @Lingling_Wei
        (END) Dow Jones Newswires

        April 20, 2015 06:31 ET (10:31 GMT)

#FX
#Forex
#BankOfChina
#BondBuying
#BothEasy
#BothHard