BEIJING/SHANGHAI (Reuters) – Investing in government bonds is not without risk, a Chinese central bank official said on Tuesday, warning of a potential market bubble and resulting turbulence if bond yields diverge from economic fundamentals.
The rapid fall in Chinese bond yields is complicating Beijing’s efforts to stabilize the weakening yuan, and the People’s Bank of China suspended purchases of government bonds in January, a move investors see as an attempt to stop yields testing new record lows.
“If yields on long-term government bonds cannot accurately reflect economic fundamentals, or if there are large changes in supply and demand… Taking into account the leverage effect of some institutions, a spiral effect could be formed by redemptions, a larger losses in the short term,” Zou Lan, head of the central bank’s monetary policy department, told a news conference in Beijing.
The central bank has intensified macroprudential management, issued risk warnings, suspended government bond purchases and switched to other liquidity tools to avoid “exacerbating supply-demand tensions and market fluctuations,” Zou said.
However, Zou’s comments had little impact on trading, with yields on China’s 10-year and 30-year government bonds falling as much as 3.25 basis points (bps) and 4 bps, respectively, on Tuesday.
Amid a global bond selloff, the trend could further widen the gap between Chinese and U.S. government debt yields, adding more unwanted pressure to the yuan, traders and analysts said.
Speaking at the same press conference, Xuan Changneng, deputy governor of the PBOC, reiterated that China will continue to take steps to stabilize the yuan at a reasonable and balanced level.
“The goal of maintaining the basic stability of the yuan exchange rate will not change,” Xuan said.
“We have the confidence, the conditions and the ability to decisively achieve the goal…we will decisively correct market pro-cyclical behaviors, decisively deal with market-disruptive behaviors, decisively prevent the risk of overshooting the exchange rate.”
Xuan said China will also adjust and improve the strength and pace of policy implementation to achieve its economic and social development goals for the whole year.
