-- Growing speculation the People’s Bank of China will add to its policy toolbox by buying and selling government bonds has market watchers debating how that’s likely to work in practice.Vietnam Tycoon Sentenced to Death Faces New Charges: MediaMuch will depend on the PBOC’s reasons to buy or sell bonds: it may wish to use the tool to attempt to cool an overheated rally, or it may have a longer-term plan for better liquidity management in the financial system, according to strategists.
Unlike peers such as the Federal Reserve or Reserve Bank of Australia which accumulated sizable amounts of debt before subsequently reducing their balance sheets, the PBOC has only bought a few batches of special sovereign bonds more than a decade ago. Instead, it has tended to use banks as proxies to manage liquidity and adjust financial conditions, which can have shortcomings.
Of the bonds the PBOC currently holds, 400 billion yuan of notes maturing in August could potentially be “rolled into longer maturities and offer the central bank some ‘ammunition’ when it needs to sell,” said Janice Xue, strategist at Bank of America. But should the PBOC’s goal be to cool the rally, a paradox is that it may not actually need to act, as a warning may be enough, according to ING and Credit Agricole.
From a timing point of view, the central bank might also wait for guidance from top officials before taking action, according to BBVA’s Le Xia.