BEIJING — China's central bank halted its purchases of government bonds on Friday in an attempt to slow a one-way bond trade that has put unwanted downward pressure on the yuan, analysts said.
The yield on Chinese 10-year bonds fell to a record low this month, while the Chinese currency traded in Hong Kong on Wednesday hit its lowest levels against the US dollar in more than a year.
The People's Bank of China is “trying to calm the market by suspending purchases of government bonds,” said Larry Hu, chief China economist at Macquarie.
The decision “indicates that the People's Bank of China is concerned about the recent rapid decline in bond yields, as it will increase the depreciation pressure of the Chinese yuan now and SVB-style financial risks in the future,” Hu said, referring to the failure of major US banks in 2023 which The shifts in capital allocation have been largely blamed on aggressive interest rate increases by the Federal Reserve.
the People's Bank of China Announced before the market opened on Friday Stop buying government bonds.
The People's Bank of China's bond-buying program only really began last year. The central bank will do so gradually, People's Bank of China Governor Pan Gongsheng said in a high-level speech in June. Adding the purchase and sale of government bonds in the secondary market to monetary policy tools.
“The People’s Bank of China may be trying to signal to all market participants that interest rates have fallen too low, too quickly,” said Peter Alexander, founder of Shanghai-based consultancy Z-Ben Advisors. “Their departure should lead to higher interest rates at least in the short term.”
“The immediate impact has been a small move in yields higher. However, we expect this impact to be relatively short-lived if the PBOC only pauses rather than defend a specific yield target as it did last year; factors that have pushed bond yields lower,” he said. Lin Song, chief economist at LNG, said: “Weak market confidence has led to strong demand for safe sources of revenue remaining.”
Reducing stimulation
China is also dealing with slowing economic growth at home. The country intensified interest rate cuts and other supports in late September, following the US Federal Reserve's shift toward easier monetary policy.
The decline in bond yields has reduced the extent to which the People's Bank of China can cut interest rates further if it needs to stimulate the economy further, said Cong Ke, a portfolio manager at Shanghai-based Wequant Asset Management.
He said the People's Bank of China's sudden halt was also intended to warn investors against speculating in rising bonds, exacerbating the decline in yields.
The People's Bank of China attributed its decision to the bond shortage, and said it would resume purchases when the balance of supply and demand changes.
Capital outflows
Qiu Zhang, president and chief economist at Pinpoint Asset Management, noted that the gap between government bond yields in China and the United States has widened, putting pressure on the yuan's exchange rate.
Compared with the 10-year US Treasury bond yield of 4.68%, the 10-year Chinese government bond yield is about 1.64%. This gap is wider than it was last August Concerns have increased about the decline in Chinese yields.
A stronger dollar and higher US Treasury yields make US-denominated assets relatively more attractive to international investors – theoretically supporting capital outflows. The US currency rose amid expectations of continued resilience of the US economy.
“Unusually high demand for bonds is also likely to be driven in part by rising expectations for a large stimulus in 2025 to address weak consumption and combat deflationary pressures,” said Brian Taikangco, an analyst at Stansbury Research.
“Unfortunately, suspending bond purchases will reduce pricing transparency in the local bond market, making it more difficult for market participants to execute orders,” he said.
Following the People's Bank of China's announcement, the yield on 10-year Chinese government bonds was little changed as of Friday afternoon. Mainland and Hong Kong stocks were trading slightly lower.
Support the yuan
China has also recently intensified its efforts to support the yuan by issuing banknotes in the Hong Kong market. The People's Bank of China will auction 60 billion yuan in six-month bonds in Hong Kong on January 15. The Hong Kong Monetary Authority said on Thursday.
Besides suspending bond purchases on Friday, the People's Bank of China is trying to use a basket of tools to signal stability in the yuan and support a gradual decline in yields, said Zong Liang, chief researcher at the Bank of China.
The Chinese yuan traded in Hong Kong rose slightly on Friday.
Haizhong Zhang, executive director of corporates at Fitch Bohua, expects the PBOC's move to help push long-term bond yields “to a reasonable level, and also help stabilize the renminbi exchange rate.”
— CNBC's Annick Pao and Ying Shan Li contributed to this report.
