Vice finance minister denies QE rumor

Central bank not planning to buy local govt bonds

China's vice finance minister on Wednesday denied a rumor that the country is planning to roll out a quantitative easing (QE) program.

China will not embark on a QE program, and the issuance of local government bonds, within a quota set by the State Council, will be a market-driven commercial measure involving commercial banks and enterprises, Zhu Guangyao, vice-minister of finance, was quoted by financial news portal cs.com.cn as saying on Wednesday.

There have been rumors circulating since Friday saying that China's central bank would soon implement a QE program by indirectly buying the local government bonds in order to release liquidity into the market.

QE is a monetary policy measure used by central banks to stimulate the economy by buying specified amounts of financial assets from the market.

"Some analysts in domestic and overseas markets misunderstood ­Chinese Finance Minister Lou Jiwei's comment on Friday, and QE is unlikely to be launched in China in 2015," Fu Bingtao, a senior research fellow at Agricultural Bank of China in Beijing, told the Global Times on Wednesday.

Lou told a press conference on Friday during the ongoing two sessions that local governments could issue bonds to raise funds to repay their debts, but he didn't unveil further details about the plan.[Special coverage]

According to the National Audit Office, local governments had accumulated debts totaling 17.9 trillion yuan ($2.86 trillion) by the end of June 2013.

The Ministry of Finance also announced in a statement on Sunday that China has allocated a quota of 1 trillion yuan for local governments to convert part of their maturing debt obligations into bonds.

Some analysts have suggested that China's central bank could buy the local government bonds as part of a QE program to spur the country's slowing economy.

Zhu denied this and said the specific plan for issuing local government bonds will be released soon, news portal cnstock.com reported late Wednesday.

"The local government bonds are expected to be sold to China's commercial banks rather than the central bank, which is prohibited by Chinese banking laws from buying government bonds in the primary market," Fu said.

It would be appropriate to sell the bonds to commercial banks under a market-driven system and without government intervention, as commercial banks are expected to be interested in the bonds given their low risk, Jiang Zhen, a research fellow at the National Academy of Economic Strategy under the Chinese Academy of Social Sciences, told the Global Times on Wednesday.

"Local governments have accumulated huge debts by financing infrastructure construction projects including toll roads, but these will eventually be repaid as there will be considerable income from the projects," Jiang said. "These would be seen as high-quality assets by commercial banks."

If the bonds are sold to financial institutions like commercial banks rather than the central bank, it could not be defined as a QE program and would have no effect on the global financial market, Fu said.

"Based on economic indicators released recently, it will not be necessary to launch a QE program in the foreseeable future," he noted.

In the first two months of this year, China's fixed-assets investment and retail sales rose by 13.9 percent and 10.7 percent year-on-year, respectively, data from the National Bureau of Statistics showed Wednesday.

The data was largely in line with previous expectations and should not trigger huge concerns about China's economy, even though the figures slightly undershot the National Development and Reform Commission's expectations of 15 percent and 13 percent, respectively, Fu said.

"Following the monetary policy easing measures that have been launched in previous months, including reserve requirement ratio and interest rate cuts, the indicators for China's economy may rebound in the second half of this year," Fu said.

The central bank is expected to implement a prudent monetary policy without drastic adjustments, Zhang Liqun, a macroeconomics scholar with the Development Research Center of the State Council, told the Global Times Tuesday.