MNI PBOC WATCH: Fiscal Expansion Key For Further Policy Easing

The People’s Bank of China will strengthen coordination with fiscal authorities and calibrate the intensity of monetary easing in line with the scale and pace of government bond issuance, as the central government remains the main sector with room to increase leverage.

The Loan Prime Rate held steady on Tuesday at 3.0% for the one-year maturity and 3.5% for the five-year tenor and above, unchanged for a ninth consecutive month. Both rates were reduced by 10bp in May after the PBOC cut the seven-day reverse repo rate – its benchmark policy rate – by 10bp to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15.

The decision was widely expected as the Bank kept its key policy rate unchanged against a backdrop of weak private-sector credit demand. (See MNI PBOC WATCH: FEB LPR To Hold As Two Sessions Approach) Advisers said an acceleration in government-bond issuance would be central to driving any broad-based monetary easing.

GOVERNMENT BORROWING

Li Daokui, a former member of the PBOC’s monetary policy committee, has called for the central government to expand issuance of ultra-long special treasury bonds significantly to swap out existing local government debt and support the property sector by subsidising new mortgages. Such measures could lift the central government’s debt-to-GDP ratio from about 28% to above 78%, still below the U.S.'s roughly 120% and 260% in Japan, Li said, warning that without an expansion in government borrowing China risks a prolonged period of sub-potential growth. (See MNI: China Govt Needs More Debt To Sustain Growth - Advisor)

Advisers and economists expect further increases in off-budget government debt quotas in next month’s Government Work Report, alongside a commitment to maintain low interest rates and ample liquidity to facilitate bond issuance.

Wang Qing, chief macro analyst at Orient Golden Credit Rating International, estimated new government debt issuance in 2026 could reach about CNY13.2 trillion, up CNY1.3 trillion from 2025, but below last year’s CNY2.9 trillion increase. That would include ultra-long-term special treasury bond issuance of about CNY1.8 trillion, compared with CNY1.3 trillion in 2025. (See MNI: China NPC To Unveil More Off-Deficit Debt, Rate Cut Eyed)

TARGETED TOOLS

In its Q4 Monetary Policy Report, released in early February, the PBOC reiterated the importance of monetary-fiscal coordination, outlining three channels, including maintaining ample liquidity to support government-bond issuance, promoting credit expansion through relending facilities and fiscal interest subsidies, and providing financing support to firms via guarantees and other credit-enhancement tools. 

The report suggested a shift in focus toward policy efficiency and effectiveness, implying easing is more likely to take targeted and structural forms, such as expanded relending facilities and greater fiscal interest subsidies aimed at boosting consumption. The Bank also said it would conduct treasury trading operations on a regular basis, with the scale determined by supply and demand conditions in the government bond market and movements in long-term yields.

Wen Bin, chief economist at China Minsheng Bank, said the PBOC is likely to increase treasury purchases, stepping up medium- to long-term buying while continuing to purchase short-dated bonds, a move that would help steepen the short- to medium-term yield curve.