Abstract: Recently, the market has engaged in extensive discussions on the government statement that “the People's Bank of China (PBOC) should gradually increase Treasury bond transactions in the open market operations”. Some believe that this may indicate that the PBOC is preparing to enter the phase of quantitative easing, while more aggressive views suggest that this signals the onset of “ modern money theory” (MMT) in China.

The brief believes that buying and selling Treasury bonds in the open market operations by the PBOC is in essence a very conservative policy choice. The two main methods of balance sheet expansion previously adopted by the PBOC—forex purchase and structural monetary policy tools—are more aggressive than direct Treasury bond transactions. As long as the PBOC continues to face policy pressure from maintaining internal and external balance, its capacity for balance sheet expansion is limited, regardless of the method of expansion. We should thus view the method of bond purchases more rationally, instead of interpreting it as a shift towards a more aggressive monetary policy approach, nor should we directly link changes in the monetary operation mode to quantitative easing and the monetization of fiscal deficits.