This morning,a move by the central bank has attracted widespread attention in the market: on the central bank's official website,under the "Open Market Operations" section,the "Announcement of Treasury Bonds Trading" column has made its appearance!

This is a small step for the central bank's official website,but it is a significant leap in China's currency issuance method (the way of injecting base money),and it will also have a major impact on the current hot bond market.

Currently,this column is still empty.

However,its emergence implies that the central bank is about to start normalizing the buying and selling of government bonds in the secondary market!

This will be one of the most significant changes in China in 2024.

By the end of the year,if there is a list of the top 10 events,it will at least be in the top five,because the impact is too great.

First,it means a major turning point in China's currency issuance method (the way of injecting base money),meaning that since the reform and opening up,the currency issuance has entered its third phase.

From the early days of reform and opening up to around June 2014,China's way of printing money was mainly "foreign exchange holdings."

During that phase,China quickly became the world's factory through reform and opening up and joining the WTO,obtaining a large amount of foreign trade surplus.

This money,after entering China,could not be used directly and had to be "settled"—that is,exchanged for RMB.

The central bank issued a large amount of RMB for this purpose,to "buy" these foreign currencies,allowing China's foreign exchange reserves to increase dramatically from $840 million in 1979 to nearly $4 trillion by mid-2014.

This led to an over-issuance of RMB,so the country raised the reserve requirement ratio for banks to about 21%,"freezing" the excess money to curb inflation.

During this stage,the anchor for the issuance of RMB can be understood as the US dollar.

From 2014 to 2024,it was the "hybrid phase" of money printing.

In these 10 years,the injection of base money was mainly through two channels: one was gradually lowering the reserve requirement ratio,releasing the previously over-issued RMB; the second was through methods such as MLF (Medium-term Lending Facility) and PSL (Pledged Supplementary Lending),printing money with high-grade bonds as the anchor,reflected in the central bank's balance sheet as "claims on financial institutions."

Starting from this year,as the central bank normalizes the buying and selling of government bonds,the way of printing money will gradually switch to "buying government bonds," increasingly approaching the method of the Federal Reserve.

Why did such a change occur?

The reason is simple: the population has reached an inflection point,real estate has reached an inflection point,land finance has reached an inflection point,and the era of rapid leverage increase for the household sector has ended.

The growth of fiscal revenue has become more difficult,but the responsibility for expenditures has increased,and China has entered an era of leverage increase for the government sector.

In the past year,both local debt and government bond balances have increased by more than 5 trillion.

In the future,there is still a large space for the issuance of government bonds,while the space for local debt is relatively smaller.

If there are too many government bonds issued,there needs to be ample funds and an active market to support them.

Therefore,many developed countries' central banks choose to buy government bonds in the secondary market when printing money.

For example,when the Federal Reserve expands its balance sheet (prints money),two-thirds of the money is used to buy government bonds,and one-third is used to buy MBS (Mortgage-Backed Securities).

The former is equivalent to printing money for the central finance,and the latter is equivalent to indirectly printing money for local finance (local finance in the United States mainly relies on real estate taxes).

From 2014 to 2024,during China's "hybrid money printing" period,channels for issuing money such as MLF and PSL gave priority to low-interest funds to state-owned large banks and policy banks,ensuring that they only made profits and did not suffer losses,which is equivalent to injecting the dividends from money printing into state-owned financial enterprises.

The high profits and high salaries of the financial industry are closely related to it to some extent.

Now,the way of printing money is going to change.

The central bank's normalization of buying and selling government bonds in the secondary market is equivalent to being a market maker in the government bond market,increasing funds in the government bond market,and taking on more government bond issuance.

It has increased the difficulty for state-owned large banks to make money easily.

In the future,the central bank's buying and selling of government bonds will become an important monetary policy tool.

When increasing the injection of base money,it will buy government bonds,and the central bank will expand its balance sheet; when withdrawing base money,it will sell government bonds,and the central bank will contract its balance sheet.

As for the other two ways of issuing money: lowering the reserve requirement ratio,and MLF and PSL,the former will gradually disappear (when the reserve requirement ratio is lowered to a certain level,there will be no more to lower),or reduce the scale (perhaps only PSL will be left in the future).

Secondly,the central bank's regulatory capacity over the bond market will be significantly enhanced.

In the past two years,the bond market has been very hot,so hot that bank deposits have moved and the stock market has bled.

The deposit move has gone to bank wealth management because wealth management products mainly buy bonds; the stock market has bled because A-shares have no profit effect,and the bond market has.

The chart above shows the trend of China's interest rate anchor—the yield on 10-year government bonds—over the past four years.

It has continued to decline,which is the fundamental reason for the hot bond market.

The market has formed a unanimous understanding: interest rates will continue to decline in the future,and the current yield on 10-year government bonds is still around 2.17%,which may be lower in the future.

Some institutions even claim to drive the yield on 10-year government bonds close to zero.

This is actually a bet that China will move towards zero interest rates.

Since interest rates continue to decline,the higher interest rate government bonds issued earlier are obviously more worth buying,so funds continue to pour in,and many institutions leverage to buy.

Buy government bonds to mortgage,mortgage to buy government bonds,and then mortgage and buy again.

The overheating of the bond market brings three negative impacts: first,it causes the stock market to bleed; second,it makes the economic outlook even worse; third,it implies a great risk.

Once a stampede occurs,it may spill over to other areas and affect many people.

It should be noted that the scale of bank wealth management is now close to 29 trillion!

For this reason,the central bank has repeatedly warned of the risks of overheating in the bond market.

However,the market only takes it as a breeze in the ear.

When the central bank stated that it would normalize the buying and selling of government bonds in the secondary market in the future,the market understood it as a unilateral benefit: the central bank does not have many government bonds in hand,and the future trend is to buy,buy,buy to support the issuance of government bonds,so isn't this a benefit?

In the end,it forced the central bank to make an unexpected major decision: first borrow trillions of yuan in government bonds,always ready to sell,to cool down the government bond market.

Since the government bonds are borrowed from large banks,selling will not bring a monetary tightening effect,and if there is any,it can be compensated by reverse repo and MLF injections.

Affected by this news,government bonds previously experienced a wave of adjustments.

However,with the increased possibility of the Federal Reserve cutting interest rates in September,government bonds rebounded again.

The chart below shows the 30-year and 10-year government bond futures listed on the China Financial Futures Exchange,which can clearly see the previous adjustment and the recent rebound.

In this situation,the central bank had to take action!

Opening the "Announcement of Treasury Bonds Trading" column implies a warning to speculative funds in the bond market once again.

The historical change in China's base money injection method may start in a dramatic way—the central bank does not buy first,but sells government bonds first!

And the government bonds sold are actually borrowed from the central bank.

This is a benefit to the current stock market and real estate market,avoiding the bond market being too dominant and becoming a black hole for funds.

Looking at the long term,China's way of printing money has undergone a significant change,and in the future,the base money injected by the central bank will better flow to the central finance through government bonds.

As the reserve requirement ratio continues to decline,this monetary tool may be discontinued,and at that time,the expansion and contraction of the balance sheet of the People's Bank of China will be meaningful.

Before,because of the existence of the reserve requirement ratio tool,it was meaningless to talk about the expansion and contraction of the balance sheet of the People's Bank of China.

Because lowering the reserve requirement ratio is monetary expansion,but it brings the effect of shrinking the balance sheet; raising the reserve requirement ratio is monetary contraction,but it brings the effect of expanding the balance sheet.

Looking further ahead,will the People's Bank of China also normalize the buying and selling of MBS (Mortgage-Backed Securities)?

Create a new channel for base money to go directly to real estate (indirectly printed for local finance)?

I think it is very likely in a few years.

Perhaps it will come with real estate tax.

At that time,our provident fund loans and commercial housing loans can be packaged as MBS to go public and sell to the central bank and social institutions.

This will be a major benefit for the real estate industry and local finance.

However,that is a matter for later.