A few years ago, China said it would not implement quantitative easing, a controversial policy of using bond purchases to stimulate the economy. Now, it appears that it is doing just that, injecting trillions of yuan into its troubled economy in a bid to help debt-laden local governments.
According to the balance sheet data, the bank’s assets amounted to 40.8 trillion yuan (approximately $5.69 trillion) in July 2023, and have been increasing every month since then. By December 2023, its asset size had soared to 45.7 trillion yuan (approximately $6.43 trillion), an expansion of nearly 5 trillion yuan (approximately $705 billion) over six months.
The unconventional monetary policy grows a nation’s central bank’s balance sheet and injects new money into its money supply through the purchase of government bonds or other financial assets.
For years, China has criticized quantitative easing. In December 2019, PBOC governor Yi Gang wrote in an article published by the CCP journal Qiushi that China should maintain “normal” monetary policy as long as possible, and would not resort to the policy, saying, “We should not let the money held by the Chinese people become worthless.”
Reshuffling Debt
China’s local governments are heavily in debt, with reports that civil servants in some areas are going unpaid, some for months. The municipal debt crisis is directly linked to the country’s real estate crisis, as land is traditionally a key source of local revenue.Mike Sun, a North American investment consultant and China expert, told The Epoch Times that the CCP is trying to solve the local government debt crisis by “quietly carrying out quantitative easing by injecting liquidity into the market.” However, he said, China’s measures will only serve to reshuffle the debt, without solving the long-term problem.
According to Mr. Sun, the CCP’s quantitative easing measures don’t actually release money into the economy or invest it in infrastructure. Instead, when commercial banks buy bonds from local governments, the local governments use the proceeds as collateral for loans from the central bank. PBOC programs such as the central bank’s pledged supplementary lending program extend central bank funding to banks, usually with government bonds as collateral.
The central bank, on the basis of that collateral, then issues more bonds. In the short term, local governments have obtained income from the central bank in the form of loans. The central bank in turn has obtained income from buyers of the additional treasury bonds it has issued.
However, the central bank has essentially repackaged the initial local government bonds, selling them in the form of medium-term, long-term, and ultra-long-term treasury bonds. From the perspective of financial theory, Mr. Sun said, the debt hasn’t disappeared. Instead, it has simply been transferred to the hands of another buyer, namely the central bank. The new debt is then reflected on the central bank’s balance sheet.
“There is no problem with issuing bonds—the key question is who the buyers are,” Mr. Sun said. “In the past, these bonds were mainly bought by foreign capital and private investors, but now the main buyers have changed to commercial banks.”
Local Debt Hits New Highs
Last July, investment banking company Goldman Sachs estimated that China’s banking system holds about 94 trillion yuan (about $13 trillion) in local government debt.In 2023, the scale of local municipal borrowing hit a record high, as China issued more than 9 trillion yuan (about $1.28 trillion) in local government bonds. Almost half of that may be used for debt repayment.
According to Chinese state media, the principal amount of local government bonds maturing in 2023 is estimated to reach about 3.6 trillion yuan (about $510 billion), which puts enormous pressure on local governments facing funding constraints.
Around half of the local government bonds issued were “new bonds,” which will be mainly used for major public welfare projects. The number of new bonds issued decreased slightly last year. About half were refinancing bonds, often referred to as “borrowing new to repay old.” There was a significant increase (82 percent year over year) in refinancing bonds, part of a Beijing-backed debt swap aimed at alleviating local government borrowing costs.
Since October 2023, more than 20 Chinese provinces have cumulatively issued more than 1.3 trillion yuan (about $180 billion) of special refinancing bonds to help local governments repay debt. That number is up from 200 billion yuan (about $29.7 billion) issued in 2022.
Earlier in 2023, in an effort to curb excessive local bond issuance, CCP authorities restricted the ability of local governments in 12 heavily indebted regions to take on new debt, and placed limits on the state-funded projects they could launch.
However, under immense pressure from the deteriorating economy, in October, the central bank made a rare decision to issue an additional 1 trillion yuan (about $139 billion) in bonds to finance infrastructure spending.
