In a striking sign of the Chinese economy’s stagnation, the central bank said on Friday that it had temporarily stopped buying government bonds.
The central bank’s unexpected action is aimed at braking a recent shift by investors toward purchasing bonds while shunning riskier assets like stocks and real estate. That shift has driven China’s long-term interest rates to a record low.
The decision to stop buying government bonds is especially unusual because interest rates have been rising lately in most of the world, in response to inflation fears. The concern about the Chinese economy is the opposite: chronically low inflation that is a hallmark of stagnation.
In China, much of the public has lost confidence as housing prices and stock markets fall steeply. Households have sought safety by pumping record sums of money into deposits at the country’s state-owned commercial banks, despite earning measly interest.
The banks, in turn, have struggled to lend these deposits to businesses. Many companies, pessimistic about the economy, are reluctant to borrow. Stuck with ever-rising deposits, the banks have invested the money in bonds.
This has driven up the price of bonds, which drives down the interest that bonds yield.
By temporarily suspending its own purchases of government bonds, the central bank is removing one source of demand for bonds. That could slow the rise in bond prices and decline in interest rates.
“The operations will be resumed at an appropriate time depending on the supply and demand conditions in the government bond market,” the central bank said.
The decision by the central bank, the People’s Bank of China, was notable because central banks facing weak growth usually buy bonds to pump money into an economy. This is what the Federal Reserve did during the global financial crisis 16 years ago and other recent financial upheavals.
The People’s Bank of China itself said six days earlier that it would make ample money available for economic growth. China will “implement a moderately loose monetary policy, so as to create a suitable monetary and financial environment for stable economic growth,” the central bank said on Jan. 4.
“Talk about sending mixed signals — today’s move is certainly not what we would have guessed as the next step after last week’s announcement,” said Mark Wu, the director of the Fairbank Center for Chinese Studies at Harvard.
Energetic purchases of bonds by the central bank are a standard policy prescription for economies facing deflation: a broad decline in prices.
In China last year, consumer prices rose just 0.1 percent last year. Wholesale prices charged by factories fell more than 2 percent. Export prices fell as much as 8 percent.
Despite signs of stalling economic activity, Chinese policymakers are concerned that bond prices are rising too fast. By halting purchases of government bonds, Beijing is trying to prevent a bubble. If bond prices later drop, that could leave commercial banks with losses.
Halting bond purchases and curbing the fall in interest rates could also help the People’s Bank stem a recent fall in the value of China’s currency, the renminbi, against the dollar. A wide gap between interest rates in China and in the United States has prompted companies and households in China to sell renminbi and buy dollars.
This has depressed the value of the renminbi, particularly in less regulated trading outside of mainland China. The renminbi’s weakness has made China’s exports even more competitive in global markets, contributing to a huge trade surplus.
The reaction by investors in China’s stock markets to the central bank’s move was unenthusiastic. The CSI 300 index of shares in large Chinese companies traded on mainland stock markets fell more than 1 percent. In Hong Kong, the Hang Seng Index fell about 0.8 percent. Both indexes are down about 5 percent since the new year, underperforming other major markets.
China’s leaders have been saying that they were ready to help boost spending and prices with more public spending. This week, they broadened a rebate program intended to spur consumers to trade in old cars and appliances and buy new ones. While those efforts have bolstered spending, investors and economists say Beijing must take more significant fiscal action.
Economists at the World Bank and at universities inside and outside China have argued that China should expand its social safety net by increasing state pensions and beefing up the health system.
Liao Min, a vice minister of finance, said at a news briefing on Friday that China planned to increase its budget deficit this year, but did not say by how much. “Fiscal policy will be significantly strengthened to support economic stability and growth,” he said, repeating the existing government stance.
China’s leaders have been wary of increased borrowing. Overall debt in China, mainly borrowed by local governments and state-owned enterprises, is already higher relative to the size of the economy than in the United States.
China’s leadership has also been committed to investing in the country’s vast manufacturing sector, which is already the world’s largest, and to the country’s extensive military buildup.
Li You contributed research.
