The Central Bank Halts Government Bond Purchases: Xi Jinping's Financial Policy in Trouble?

Photo caption: Recently released May financial data once again confirms the grim state of China's economy. (Photo by China Photos/Getty Images)

[People News] On the morning of January 10, the People’s Bank of China (PBOC) announced that due to the persistent supply-demand imbalance in the government bond market, it has decided to suspend open-market purchases of government bonds starting January 2025. The central bank stated that it would resume operations when market conditions warrant.

The PBOC had been purchasing short-term government bonds for five consecutive months, causing the one-year yield to dip below 1% in late December 2024. Following the announcement, the bond market saw a rebound: two-year government bond futures hit their lowest price in over a month, and the two-year spot yield rose six basis points. Offshore RMB experienced a slight increase. However, after a brief uptick, the yields on 10-year and 30-year government bonds retraced as buying interest reemerged.

At the Central Financial Work Conference held in late October 2023, Xi Jinping emphasized the need to "expand the monetary policy toolbox" and urged the PBOC to gradually increase its open-market purchases of government bonds. In essence, the central bank's direct intervention in the bond market was a directive personally initiated and overseen by Xi.

Xi’s instructions were disclosed in early 2024, clarifying that "this does not mean purchasing government bonds in the primary market, nor does it signify a shift to quantitative easing." However, public opinion has largely dismissed these claims, viewing this policy as China’s version of quantitative easing.

In late September 2024, the Chinese government made a dramatic policy shift, implementing a series of monetary and fiscal stimulus measures to reverse the economic downturn. At the year-end Central Economic Work Conference, officials reaffirmed their commitment to “moderate monetary easing” for the coming year, marking the first such mention in 14 years since 2008. This underscores the severe concerns within the Chinese leadership about the economy, signaling a readiness to adopt aggressive measures.

The PBOC’s intervention in the bond market has been described by the Chinese government as a means to enhance liquidity. However, external observers argue that it signals the onset of an era of uncontrolled monetary expansion, either through direct printing or debt-backed liquidity injections.

Over the past decade, Chinese bond prices have steadily risen due to their backing by government credit, making them widely regarded as risk-free assets. Three years ago, a rapid decline in China’s real estate market, a weak stock market, and a struggling real economy drove investors to pour money into bonds, while bank deposits soared. This accelerated the rise in bond prices, further reducing government bond yields. To stimulate the housing market, the Chinese government repeatedly lowered bank interest rates. As of now, the yield on 10-year government bonds is close to the rate for three-year fixed deposits, diminishing the investment appeal of government bonds.

Why Did the Central Bank Announce a Halt to Government Bond Purchases Just a Month After the CCP Economic Work Conference? The People’s Bank of China (PBOC) announced the suspension of government bond purchases just one month after the Chinese Communist Party’s (CCP) Economic Work Conference. What are the reasons behind this decision? The low-profile nature of the announcement likely reflects the central bank’s fear of being labeled as politically disloyal. After all, Xi Jinping had explicitly called for bond purchases, and now the PBOC’s decision seems to contradict his directives. What’s driving this?

There are two main factors at play: 1. Concerns Over a Bond Market Bubble. The PBOC is worried about a potential bubble in the Chinese bond market. The Politburo recently emphasized the need for “proactive and effective macroeconomic policies” and “moderately loose monetary policies,” fueling investor expectations for further interest rate cuts and reserve requirement reductions. This has intensified demand for government bonds. Since December 2024, the bond market has surged, with 10-year government bond yields historically falling below 2.0%, even dipping below 1.6% at their lowest point, ushering in an era of sub-2% yields. Amid economic downturns, a weak real estate market, private enterprises under government pressure, and significant capital flight, banks have struggled to lend money, leading to narrower net interest margins. Many banks now rely heavily on government bond purchases as a primary source of investment income—particularly rural commercial banks, where government bonds have become a cornerstone of asset allocation. By halting bond purchases, the PBOC aims to reduce demand in the market, ease the current supply-demand imbalance, and temper the bond market's "overheated" enthusiasm. This move helps mitigate asset shortages and balances the government bond market's dynamics.

2. Pressure from External Factors and Exchange Rate Stability. The second major factor is the external economic environment. With Donald Trump winning the U.S. presidential election, trade tensions loom large over the Chinese economy. Meanwhile, the strong U.S. economy and the Federal Reserve’s slower-than-expected rate cuts have strengthened the dollar, pushing the RMB exchange rate below the 7.3 threshold. The yield inversion between Chinese and U.S. bonds has increased pressure on the RMB, raising the risk of speculative attacks. To address this, the PBOC recently issued 60 billion yuan in central bank bills in Hong Kong, aiming to reduce RMB liquidity and stabilize the offshore RMB exchange rate. A continued RMB decline would further erode market confidence and accelerate China’s economic downward spiral—an outcome the CCP seeks to avoid. By halting government bond purchases, the PBOC is signaling an effort to stabilize the RMB exchange rate, a critical part of its mandate.

To stabilize the bond market and RMB exchange rate, the CCP has been forced to scale back its monetary easing policies. This could delay or weaken the "moderate monetary easing" agenda set by the CCP leadership, leaving Xi Jinping’s ambitious promise to “enhance the monetary policy toolbox” unfulfilled.

The underlying reason for these challenges is the CCP’s failure to improve China’s economic fundamentals. On January 9, China’s National Bureau of Statistics released data showing that December 2024 CPI and PPI figures remained weak, highlighting persistent downward pressure on the domestic economy. With insufficient aggregate demand, an aging population, and risks from U.S.-China decoupling, the push for moderately loose monetary policies has hit a roadblock. As 2025 begins, economic troubles have surfaced prominently.

Widespread Economic Malaise Across Sectors. China's economy is experiencing a severe downturn across industries: Catering Industry: Over 1.05 million restaurants closed in the first half of 2024, with an estimated total of over 2 million closures for the year. Banking Sector: 199 small and medium-sized banks were deregistered in 2024, primarily rural financial institutions, far exceeding the combined total from 2021 to 2023. Thousands of bank branches also closed. Media Industry: By the end of 2023, nearly 700 county-level TV stations had shut down, with nearly 2,000 more at risk, leading to massive job losses in media.

Film Industry: According to data from the National Film Administration, China’s total box office revenue in 2024 was 42.5 billion RMB (approximately $5.82 billion), a 22.6% drop from 2023 and 34% below the pre-pandemic peak in 2019. The collapse of industries like catering and film—traditionally supported by young consumers—reflects serious income and employment issues among younger demographics.

From January to October 2024, China reported the establishment of 46,893 new foreign-invested enterprises, an 11.8% year-on-year increase. However, the actual utilized foreign investment totaled 693.21 billion RMB—a sharp decline of 29.8% compared to the previous year.

Recently, Xi Jinping confidently declared in various forums that China’s 2024 GDP growth target of 5% had been “successfully achieved.” Yet, this assertion seems laughable given the stark realities: domestic demand remains critically weak, and youth unemployment stands at a staggering 16%. How exactly was this "5% growth" accomplished? Since September 2023, China’s economy has been oscillating between emergency interventions akin to ICU treatment and official proclamations of recovery and healthy development. Such contradictions have turned Beijing’s claims into a global punchline.

(First published by People News)