BEIJING – China’s central bank halted purchases of government bonds on Friday in an attempt to slow one-way bond trading that has put unwanted pressure on the yuan’s decline, analysts said.
The yield on China’s 10-year bond fell to a record low this month, while the Chinese currency traded in Hong Kong on Wednesday at its weakest against the US dollar in more than a year.
The People’s Bank of China is “trying to cool the market by suspending the government[ernment] bond buying,” said Larry Hu, chief China economist at Macquarie.
The decision “suggests that the PBOC is concerned about the recent rapid decline in bond yields, as it will increase CNY depreciation pressure now and SVB-style financial risk in the future,” Hu said, referring to the collapse of a major US bank in 2023. blamed shifts in capital allocation due to the Federal Reserve’s aggressive rate hikes.
The PBOC announced before the market opened on Friday stopping the purchase of government bonds.
The PBOC’s bond buying program actually only started last year. PBOC Governor Pan Gongsheng said in a high-profile speech in June that the central bank would gradually add the buying and selling of government bonds in the secondary market to your monetary policy toolbox.
“The PBOC may be trying to signal to all market participants that rates have fallen too low and too fast,” said Peter Alexander, founder of Shanghai-based consultancy Z-Ben Advisors. “Their divergence should lead to higher rates at least in the short term.”
“The immediate effect was a small shift in yields higher. However, we expect this impact to be relatively short-lived if the PBOC just pauses and does not defend a specific yield target as it did last year; factors driving bond yields lower such as weak market confidence leading to strong demand for safe sources of yield remains in place,” said Lynn Song, chief economist at LNG.
Limiting stimulus
China is also dealing with slower economic growth at home. The country stepped up interest rate cuts and other support at the end of September, following the US Fed’s turn toward easier monetary policy.
Falling bond yields reduced the extent to which the PBOC could cut interest rates further if needed to further stimulate the economy, said Zong Ke, a portfolio manager at Shanghai-based asset manager Wequant.
He said the PBOC’s sudden suspension was also meant to warn investors against speculatively jumping into bonds, exacerbating the fall in yields.
The PBOC attributed its decision to a bond shortage and said it would resume purchases when the balance of supply and demand changes.
Capital outflows
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, noted that the spread between Chinese and US government bond yields has widened, putting pressure on the yuan.
Compared to the 10-year US Treasury bond yield of 4.68%, the 10-year Chinese government bond yield is around 1.64%. This gap is even bigger than it was in August, when worries about falling Chinese yields have intensified.
A stronger dollar and higher US Treasury yields make US-denominated assets relatively more attractive to international investors — theoretically supporting capital outflows. The dollar rose on expectations of further resilience of the US economy.
“The unusually strong demand for bonds is also likely driven in part by rising expectations of big stimulus in 2025 to address weak spending and combat deflationary pressures,” said Brian Tycangco, analyst at Stansberry Research.
“Unfortunately, the suspension of bond purchases will reduce the transparency of pricing in the domestic bond market, which will make it a bit more difficult for market participants to execute orders,” he said.
Following the PBOC’s announcement, the yield on China’s 10-year government was little changed on Friday afternoon. Shares in the mainland and Hong Kong traded slightly lower.
Support for the yuan
China has also recently stepped up efforts to support the yuan by issuing notes in the Hong Kong market. The PBOC will auction six-month bills worth 60 billion yuan in Hong Kong on January 15. The Hong Kong Monetary Authority announced on Thursday.
Taken together with the suspension of bond purchases on Friday, the PBOC is trying to use a set of tools to signal the stability of 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 Chang, managing director of corporations at Fitch Bohua, expects the PBOC’s move can help bring long-term bond yields back “to a reasonable level, and also help stabilize the RMB exchange rate.”
— CNBC’s Anniek Bao and Ying Shan Lee contributed to this report.
